But an environment in which borrowing is free and the real interest rate is considerably lower than trend growth in the economy is unlikely to be sustainable over time. Chart: Estimates of the neutral interest rate The neutral interest rate cannot be observed and must be estimated. In the Bank’s Monetary Policy Report, the current neutral real interest rate in Norway is assumed to be around zero. The estimate is based on calculations from a range of different models. As we can see in the chart, these calculations show that the neutral interest rate has fallen to a historically low level close to zero over the past 20 years. With an inflation target of 2 percent, this means that setting the policy rate at zero would enable us to bring the real interest rate down to 2 percentage points below its equilibrium level.1 2 In Norges Bank’s assessment, monetary policy has sufficient room for manoeuvre with an inflation target of 2 percent. First, international experience has shown that the room for manoeuvre in monetary policy is not exhausted when the policy rate is close to zero. I will come back to this. Second, our calculations show that over the past 20 years, the real interest rate has normally remained less than 2 percentage points away from its estimated equilibrium level.3 This may suggest that a real interest rate that is 2 percentage points below equilibrium has in most cases provided sufficient economic stimulus.
These developments will push up inflation and imply that the policy rate must be set higher than we envisaged earlier for inflation to return to target. Price stability is essential for a well-functioning economy. High inflation is weakening household purchasing power, and lower-income households with the smallest margins are being hit hardest. Borrowers are facing higher interest rates on top of high inflation, and many will be coping with tighter budgets. But by raising the policy rate, we are helping to bring down inflation, which is in everyone's interest. Chart 3 Turbulence in international banking markets In recent weeks, problems at certain US and Swiss banks have led to large movements in global financial markets. Equity markets have fallen, and risk premiums in money and bond markets have increased a little. Expectations for both Norwegian and international policy rates have declined markedly. 1/3  BIS - Central bankers' speeches  We are not seeing any signs of liquidity problems for Norwegian banks. Norwegian banks are profitable, well capitalised and well positioned to cope with losses and market stress. Households and firms appear to have ample access to credit. We are closely monitoring developments and we are always prepared to take the measures required to safeguard financial stability if needed. Let me say a little more about the economic outlook and our assessments. Chart 4 Persistently high Inflation among trading partners Inflation is also high among our trading partners, although it has recently moderated a bit. Labour markets are tight.