In any case, the ECB’s medium-term orientation of our price stability objective provides us with some leeway to see through transitory energy-driven increases in headline inflation. Beyond energy prices, non-energy prices – and hence core inflation – would not be isolated from the impact of climate policies either. To the extent that carbon-intense producers of non-energy goods and services pass the costs of rising carbon taxes and other interventions on to their consumers, we could also see sizeable upward pressure in core inflation. All in all, persistent upward pressure on, or substantial volatility in, headline inflation stemming from sustained climate policies could lead us to rethink how we formulate our policies in pursuit of price stability over the medium-term horizon. Climate change and the natural interest rate More indirectly, but no less importantly, climate change and the remedial actions needed to tackle it could affect central banks' ability to achieve price stability through their impact on the so-called natural interest rate2, which is an important benchmark for inflation-targeting central banks when setting our interest rates. 2  The natural interest rate is the level of real interest rates consistent with aggregate output being at its potential level and inflation stable at its target. 2  Natural interest rates in advanced economies, including the euro area, have declined in recent decades, reflecting structural shifts in the balance between aggregate saving and investment. The literature attributes this decline mostly to three main factors: a decline in trend productivity growth, demographic developments and a scarcity of safe assets.

Based on our experience over this period, it is Norges Bank’s assessment that the monetary policy framework has worked well. Inflation has been predominantly low and stable since inflation targeting was introduced in 2001. Average annual consumer price inflation has been close to, albeit somewhat below, 2.5 percent. At the same time, employment has consistently been more stable since 2001 than in previous periods, in spite of the fact that the Norwegian economy has been exposed to substantial shocks. Chart: Inflation The inflation target has anchored inflation expectations. At the same time, there has been sufficient room for flexibility and the exercise of judgement to enable monetary policy to dampen the impact on output and employment when the economy has been exposed to shocks. Our experience has shown us the crucial importance of flexibility in inflation targeting to enable us to make the appropriate trade-offs in response to these shocks. The time horizon for achieving the target must be sufficiently long, and the balance of risks, including risks related to 3/4  BIS central bankers' speeches  financial stability, must be taken into account. We have also experienced the important role the exchange rate has played as shock absorber, particularly during the financial crisis and in periods of falling oil prices. At the same time, the interest rate level abroad places limitations on the room for manoeuvre in monetary policy in a small open economy such as Norway. Monetary policy’s main task is to provide the economy with a nominal anchor.