Øystein Olsen: The conduct of monetary policy Introductory statement by Mr Øystein Olsen, Governor of Norges Bank (Central Bank of Norway), at the hearing before the Standing Committee on Finance and Economic Affairs of the Storting (Norwegian parliament), Oslo, 19 May 2016. *  *  *  Please note that the text below may differ from the actual presentation. Thank you for the opportunity to report on the conduct of monetary policy. My introduction here today is based on Norges Bank’s Annual Report for 2015 and our monetary policy assessments up to the monetary policy meeting last week. Chart: Inflation Monetary policy in Norway has since 2001 been oriented towards keeping inflation low and stable. The operational target is consumer price inflation of close to 2.5 percent over time. Over the past 15 years, inflation has averaged around 2 percent. This is close to the target. Norges Bank operates a flexible inflation targeting regime, giving weight in our interest rate setting to developments in output and employment as well as inflation. The effects of monetary policy are uncertain. This normally suggests proceeding with caution. As monetary policy also seeks to be robust and take account of the risk of particularly adverse outcomes for the economy, the tasks of monetary policy should include contributing towards mitigating the risk of a build-up of financial imbalances.
In the wake of the sharp fall in oil prices since summer 2014, the key policy rate has been lowered several times. Monetary policy is facilitating restructuring by supporting a weaker krone and thereby speeding up the adjustment to a lower cost level. In addition, lower interest expenses are easing the burden for many households and enterprises. There is still room for manoeuvre in monetary policy. However, in an economy undergoing restructuring, monetary policy cannot fully counteract the effects on output and employment. Internationally, monetary policy has faced substantial challenges in recent years. Inflation and interest rates are both close to zero in many countries. The instruments used have rarely been used before. The effect of this policy is uncertain and the expected increase in policy rates has been repeatedly pushed further into the future. Central banks are in uncharted territory. The experiences of other countries indicate that the lower bound for policy rates is below zero, although precisely how far below is difficult to estimate. Lower interest rates may increase financial system vulnerabilities. Low interest rates also increase the risk of a surge in credit growth and property prices. When the key policy rate approaches a lower bound, the uncertainty surrounding the effects of monetary policy increases. This suggests proceeding with greater caution in interest rate setting. However, should the Norwegian economy be exposed to new major shocks, the possibility cannot be excluded that the key policy rate in Norway may also turn negative.