Although there will still be considerable uncertainty, it will be easier for economic agents to assess interest rate developments. This makes monetary policy more effective. The prospect of a gradual normalisation of interest rates may curb credit growth and the rise in house prices. There may be objections to our producing interest rate projections. Producing an explicit interest rate projection may be stretching our knowledge quite far. It may be argued that market participants’ overview and insight are just as good as ours and that our analyses do not add much beyond the information embedded in market rates. Another objection is the risk of the interest rate path becoming a target itself and that deviating from the interest rate projection would be perceived as a drawback, even if economic developments should so imply. It is important to stress that the interest rate path is conditional on economic developments and our understanding of the functioning of the economy. This is reflected in the fan chart bands surrounding future interest rate developments. The central bank of New Zealand has experience in producing interest rate projections, and actual interest rate developments have on many occasions differed from the projections 1 . We must also expect deviations from our projections. The interest rate will deviate from the projections if economic developments are different from the assumptions applied when the interest rate projection was published or if we change our view of how the economy functions.
This means that energy prices are included but they have considerably less weight than in the CPI. Of the measures that we use for underlying inflation, the CPI-ATE has tended to be lowest. All four measures indicate that inflation has been moderate in recent years and have implied an expansionary monetary policy. The rise in prices we have recently observed could affect inflation in the period ahead through compensation for earlier inflation, the pass through of costs to selling prices and through expectations of future price inflation. By using various measures of underlying inflation, we seek to capture the portion of the rise in prices that may influence future inflation. It is always difficult in real time to determine which price movements will persist and which will only have a short-term effect on the CPI. An assessment of underlying inflationary pressures should probably be based on several different indicators and developments in these should be followed up by discussion and interpretation of the underlying causes. Allow me to conclude. Developments over the past 40 years have illustrated that the most important contribution monetary policy can make to sound economic developments in the long term is low and stable inflation. This provides the economy with a nominal anchor. In its conduct of monetary policy, Norges Bank operates a flexible inflation targeting regime, so that weight is given to both variability in inflation and variability in output and employment.