The Norwegian government lowered the central bank’s inflation target to 2%, which caused raising the value of the local currency. In this way, the country changed its policy in line with its key partners by refraining from reaching a 2.5% inflation rate of 17 years ago.
“Setting the inflation target should be perspective and flexible, so to contribute to the development and stability of production and the labor market and counteracting the accumulation of financial imbalances”, says the statement of the Norwegian Finance Ministry.
For comparison, Sweden, the United Kingdom, the United States and the European Central Bank are targeting inflation of around 2%. The market players, however, are doubting whether the change in the inflation target will lead to a faster rise in key interest rates. The local currency appreciated by about 1.5%, reaching a five-week high against the euro at 9.5425 NOK.
“The new regulation clarifies the picture of Norway’s monetary policy and supports the central bank’s flexible approach to inflation”, said the Governor of Norges Bank, Oystein Olsen. In addition, the bank believes that the new target will not lead to significant changes in the conduct of monetary policy.
Norway, which is oil and gas producer, introduced its inflation target in 2001 at a time when it expected large revenues from its energy industry.
“This period has passed and there are no compelling arguments for targeting a higher inflation rate than other countries”, said the Norwegian Finance Minister, Siv Jensen.
According to many economists the decision is surprising, signalling the markets that the central bank will raise interest rates faster than before, but that it is still unclear whether the change in the inflation target will lead to that.
In January, core inflation in Norway, adjusted for energy and taxes, was far below the two targets, at just 1.1%.
The key interest rate is a record low of 0.5%, and the central bank said it aims to raise loan costs by the end of 2018.
In December, the Norwegian central bank predicts that core inflation will grow to 2.1% by 2020 – the last year of its projected horizon.