With a constrained room for maneuver in monetary policy, central banks have found it useful to communicate specific conditions likely to be fulfilled before a change in the stance of monetary policy should be considered. In the aftermath of the international financial crisis, conditional statements both related to the likely time it would take before a tightening should be considered and statements about thresholds for some variables have been used. Both the Federal Reserve and the Bank of England have for instance been linking future policy actions to specific unemployment thresholds. Publishing the central bank’s own interest rate forecast as a regular part of monetary policy communication is a third type of forward guidance. The Reserve Bank of New Zealand was the first central bank to pursue this approach in 1997, followed by Norges Bank in 2005. 5 This type of forward guidance is also conditional, and it is typically accompanied by a consistent forecast for output and inflation. As the interest rate forecasts are revised, market participants learn over time how the central bank normally responds to different types of shocks. When the central bank explains how it plans to achieve its target, it may also improve confidence and credibility. Forward guidance in Norway Before I present our version of forward guidance, let me give you a brief background on the Norwegian economy and our monetary policy framework. [Chart: The Norwegian economy] Norway is a small, open, natural resource-rich economy. About a quarter of our GDP is related to oil and natural gas extraction.

13 The index correlates well with our forecast for the change in the key policy rate over the coming year, derived from each vintage of our interest rate forecast. The chart is consistent with households being well informed about the interest rate changes predicted by Norges Bank. Concluding remarks Let me summarise: Norges Bank has provided forward guidance through publishing conditional forecasts for the key policy rate for almost a decade. Our overall experience is positive. We have indications that our reaction pattern is well understood, that agents understand the conditionality of our forecast and that they do pay attention to our predictions of future rates. Over time, however, we should be measured on whether we meet our overriding objective, price stability. A credible interest rate forecast shedding light on the reaction pattern of the central bank provides a clear commitment to price stability and contributes to anchoring expectations. 13  When the index is above 50, the share of households that expect bank rates a year ahead to be higher than today is larger than the share that expect it to be lower. BIS central bankers’ speeches  7  How forward guidance is best provided will depend on economic and institutional factors. A decade of forward guidance in Norway indicates, however, that regularly publishing our own interest rate forecasts is a robust strategy. However, there are unsolved issues. After the international financial crisis, robustness and the interaction between monetary policy and financial stability have become more pressing concerns for monetary policymakers.