The Riksbank has therefore specified a target, whereby inflation should be 2 per cent. To emphasise that it is not possible to continuously achieve the target exactly, the Riksbank has also specified a tolerance interval around the target of plus/minus 1 percentage point. The Riksbank’s inflation target is well in line with the targets chosen by other central banks. The fact that we have a target for inflation does not mean that we disregard developments in employment and unemployment. The Riksbank conducts what is usually called flexible inflation targeting. This means that we take real economy developments into consideration when making monetary policy decisions. If inflation for some reason deviates from the target, we must decide how quickly inflation should be brought back on target. This depends on how, among other things, unemployment is affected. This is also in line with the preliminary work to the Sveriges Riksbank Act. It is stated there that the Riksbank shall support the targets for general economic policy with a view to achieving sustainable growth and employment without prejudice to the objective of price stability. There is no simple correlation between inflation and unemployment Unemployment varies over the economic cycle. Normally, unemployment is below its so-called longterm equilibrium level when economic activity is good. A high level of resource utilisation in the labour market normally also means that the pressure from wage increases is high. This in turn has the shortterm effect of pushing up inflation. In economic downturns, however, unemployment is high and resource utilisation is low.

If developments in the Norwegian economy are broadly in line with that projected in the period ahead, there are nevertheless prospects that the key policy rate will be reduced further in the course of the first half of this year. The analysis in the latest Monetary Policy Report suggests that capacity utilisation in the Norwegian economy will decline ahead. Moreover, there are prospects that unemployment may increase somewhat, but reduced labour immigration will likely limit the increase. The krone deprecation since autumn 2014 will contribute to underpinning inflation in the coming period, but inflation is projected to move down further ahead. In the conduct of monetary policy, we seek to mitigate the risk of a build-up of financial balances, but monetary policy cannot assume a primarily responsibility for financial stability. Should financial imbalances build up further, the required countercyclical capital buffer for banks may be increased. Rapid rises in house prices and debt may also require the implementation of other, more targeted measures in order to mitigate the risk associated with the high level of household debt. In March this year, the Ministry of Finance requested Finanstilsynet (Financial Supervisory Authority of Norway) to consider whether it would be appropriate to implement measures aimed at limiting growth in credit and house prices. Norges Bank submitted its comments today where we endorse Finanstilsynet’s proposal while underlining the importance that regulation should give the banks flexibility – and responsibility for conducting sound credit assessments.