Ida Wolden Bache: Remarks on Norges Bank Watch Series report
Remarks by Ms Ida Wolden Bache, Deputy Governor of Norges Bank (Central Bank of Norway),
on the Centre for Monetary Economics' (CME) assessment of the Norges Bank's conduct of
monetary policy, published in its Norges Bank Watch Report Series, Oslo, 1 March 2022.
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In February/March each year, the Centre for Monetary Economics (CME) presents a report
commissioned by the Ministry of Finance on Norges Bank's activities. A committee of
independent economists assesses Norges Bank's conduct of monetary policy. The reports are
published by the CME in its Norges Bank Watch Report Series.
First, I would like to thank this year's Norges Bank Watch committee for a high quality report. I
also thank you for the opportunity to comment on the report.
As the previous year, 2021 was marked by the Covid pandemic. Economic activity fluctuated
with the extent of Covid transmission and containment measures, but at the same time picked
up clearly through the year. Over the course of summer and autumn, activity and employment
rose above their pre-pandemic levels.
As economic conditions were normalising, there was no longer a need for the same degree of
monetary accommodation. Towards the end of last year, it also became clearer that the
objective of stabilising inflation around target somewhat further out was consistent with a
normalisation of the policy rate.
Norges Bank Watch commends our conduct of monetary policy through 2021, and how we
communicated our policy and analyses. However, it is pointed out that the communication
framework could be enhanced, for example, by publishing detailed minutes of the meetings of the
Monetary Policy and Financial Stability Committee.
Communication is an important instrument of monetary policy, and we recognise that clear
communication and predictability are crucial. All information concerning a policy rate decision is
to be published at the same time, in the same place and in both Norwegian and English.
The Monetary Policy Report is designed to reflect the Committee's actual decision basis.
The Monetary policy assessment in the Report sheds light on the key trade-offs and questions
the Committee was particularly concerned with in its discussions. We are also open about our
strategic thinking and methodologies. In December last year, we published the Committee's
monetary policy strategy. Detailed background for the conduct of monetary policy and the
strategy is now presented in Norges Bank's "Monetary Policy Handbook", which was published
last month.
Central banks differ in their communication strategies, and the models have advantages and
drawbacks. The communication strategy chosen is usually related to the way the central bank is
organised, as well as to traditions and experience. After the Committee was established in 2020,
the issue of minutes and communication of diversity of views has been discussed on several
occasions. So far, the Committee has decided not to publish minutes of its meetings and to
continue to speak with one voice. One reason is that we seem to be getting our message
across. Our monetary policy reaction pattern appears to be known and understood. We think that
there is a risk that minutes might impair the quality of the Committee's discussions, and that
speaking with more than one voice might entail less clarity. But I can promise that the Committee
will continue to discuss the form and content of its communication.
The difficulty in making these assessments is not an argument against being clear about when
and why financial stability considerations affect policy decisions. Quite to the contrary. The
publication of the strategy and the handbook is a step towards greater clarity, but our ambition is
to go further here.
Norges Bank Watch also comments on our approach regarding the aim of high and stable output
and employment, as specified in the monetary policy strategy. The strategy sets out that high
unemployment entails direct costs both for society as a whole and for those who do not find
work. Very low unemployment, on the other hand, only involves the indirect costs of potentially
excessive wage and price inflation. Norges Bank Watch points out that taking into account this
asymmetry in the monetary policy reaction pattern, as indicated in the strategy, may generate an
inflation bias - namely excessive inflation over time. That is true in isolation, but there are also
opposing factors. Taking into account the aim of mitigating a build-up of financial imbalances can
in isolation impart a negative inflation bias - namely too low inflation over time. A lower bound on
the policy rate may also lead to inflation being too low over time.
We have no evidence suggesting a net inflation bias in our reaction pattern, whether positive or
negative. In any event, it is not possible to fine-tune inflation, and small deviations from the target
are not likely to entail any significant economic costs. What we aim to avoid are large and
persistent deviations from the inflation target, whether above or below target.
Norges Bank Watch notes that Norges Bank's FX transactions on behalf of the government
result in money market volatility. Let me first point out that the primary objective of our liquidity
management is to keep the very short-term money market rates close to the policy rate, by
ensuring that there is sufficient liquidity in the banking system every day. This is reflected in the
market when the interbank overnight rate is very close to the policy rate. The price banks pay for
liquidity at longer maturities may vary. As long as the short-term money market functions, we do
not try to steer longer-term risk premiums.
As to the FX transactions, our task is to convert the correct volume of foreign exchange for
meeting the government's need for krone liquidity, as projected by the Ministry of Finance. At the
same time, we want the FX transactions to be as smooth and predictable as possible. In recent
years, it has been especially difficult to anticipate and project conversion needs. There have been
substantial and abrupt swings in government petroleum revenues, and the expenditure side has
been less predictable than normal. We have therefore, over the past year, been exchanging
more information with the Ministry of Finance, and we have discussed how we can better handle
large changes in cash flows.
Let me conclude by again thanking Norges Bank Watch for an excellent report. I read with keen
interest both the thorough review of this past year, and not least, the comparison of economic
developments and the conduct of policy in New Zealand and Norway. An independent
assessment of our work and policies is of great value, and we will certainly take note of the
report's recommendations in our work going forward.
Thank you for your attention.