Global growth is being driven by rapidly growing emerging economies. In the euro area, activity has slowed in several of the largest economies, and there are prospects that the downturn may persist for somewhat longer than previously envisaged. Unemployment is high and rising in a number of countries. In Spain and Greece, unemployment now exceeds 25 percent, and among young people, more than half are jobless. The economic situation is better in the US, but growth is moderate. Oil prices have fallen somewhat in the course of spring, but are still at a high level. With key rates close to zero, several central banks have adopted unconventional measures to stimulate growth and support inflation. Measures that change the composition and size of a central bank’s balance sheet differ from the usual monetary policy operations in that instruments other than the key rate are deployed to influence market rates and economic activity. The ECB and the central banks in the US, the UK and Japan have implemented such balance sheet policies to directly influence long-term interest rates and thus funding costs for enterprises and households. The Japanese central bank also introduced new measures this spring. The central bank will double the monetary base by the end of 2014, mainly by buying more Japanese government bonds, in order to boost inflation, reduce real interest rates and promote economic growth. The improvement in global financial markets reflected the measures implemented by the ECB through 2012.
The first criterion states that the interest rate should be set with a view to stabilising inflation at target or bringing it back to target after a deviation has occurred. The specific time horizon for stabilising inflation at target will depend on the disturbances to which the economy is exposed and their duration. The second criterion states that the interest rate path should provide a reasonable balance between the path for inflation and the path for overall capacity utilisation in the economy, i.e. that the inflation targeting regime is flexible. Flexible inflation targeting builds a bridge between the long-term objective of monetary policy, which is to provide an anchor for expectations of low and stable inflation, and the objective of stability in the economy. The third criterion states that monetary policy should be robust and should seek to mitigate the risk of a build-up of financial imbalances. The criterion is an expression of the lack of a complete understanding of how the economy functions or the shocks to which the economy may be exposed. The consideration of robustness can therefore be interpreted as a form of insurance against adverse outcomes. Norges Bank does not have independent objectives for asset price inflation or debt growth. However, by mitigating the risk of financial imbalances, we may also achieve more stable developments in inflation, output and employment over time. In the case of conflicting objectives, the choice of interest rate path will involve a trade-off between different considerations.