PROJECTIONS AND EXPECTATIONS.

Author:Gjedrem, Svein
Position:Brief Article
 
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Norges Bank has announced that in future the Bank will normally make an extensive evaluation of monetary policy once a month. The Bank has published the dates for the Executive Board's main monetary policy meetings. The Bank will, as far as possible, clarify which factors we consider when decisions are taken. The purpose is to reduce the risk for market participants and avoid unnecessary speculation.

Norges Bank sets the interest rates on banks' loans and deposits in the central bank and thereby influences the level of interest rates in Norway. The objective of monetary policy, as stipulated by the authorities, is stability in the krone exchange rate against European currencies. Since the beginning of the year Norges Bank has interpreted the concept "European currencies" as the euro. However, the Bank does not have instruments to fine-tune the exchange rate. In the orientation of instruments, the Bank emphasises the fundamental conditions for exchange rate stability. Price and cost inflation must, therefore, be brought down to the corresponding aim in the euro area. At the same time, monetary policy is oriented with a view to avoiding deflationary recessions, as this would undermine confidence in the krone.

Norges Bank presents its evaluations of economic developments in the Inflation Report. We use a technical assumption concerning future interest rate developments, which is primarily based on market expectations, as indicated by forward rates. The projections indicate a path for the Norwegian economy given that interest rates move in line with these expectations. If the projections show balanced economic developments, they may support current interest rate expectations.

However, if the projections show an abrupt turnaround in the economy, with low and falling price...

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