øystein olsen : how central banks influence interest rates speech by mr øystein olsen, governor of norges bank ( central bank of norway ), at the centre for monetary economics ( cme ) / bi norwegian business school, oslo, 1 october 2015. * * * please note that the text below may differ from the actual presentation. accompanying charts can be found on the norges bank ’ s website. introduction a number of items appear on my calendar every year. today ’ s speech is one of them. three years ago, the speech was entitled “ monetary policy in turbulent times ”. the theme was how central banks worldwide were adopting new approaches to the conduct of monetary policy. chart : international yield curves three years later, this theme has not lost its relevance. the list of countries that have adopted quantitative easing has grown longer. policy rates in some countries have fallen below the zero lower bound, and we have seen examples of negative yields on bonds. this has challenged a long - held belief – that the lower bound for nominal rates is zero. the measures have a common goal, which is to bring down market interest rates and keep them there until a firm economic recovery is achieved. by influencing interest rates on financial contracts of varying duration and risk, monetary policy seeks to stabilise inflation and stimulate output and employment. in this speech, i will take a closer look at how policy rates affect money and financial markets and the impact of the unconventional measures implemented. even though interest rates have been low for a long time, activity in advanced economies has been slow to recover, reflecting global developments and economic shocks in the wake of the financial crisis. low policy rates and quantitative easing in other countries have also influenced the norwegian bond market. yields on norwegian long - term government bonds have fallen to a very low level, primarily driven by policy rate setting in other countries and global financial markets rather than economic conditions in norway. and even though the recent cuts in norges bank ’ s key policy rate have followed in the wake of the fall in oil prices, the current low level is a result of low interest rates abroad. the policy rate is the central bank ’ s most important monetary policy instrument. before we turn to global developments, i will therefore briefly describe how the policy rate influences the shortest end of the curve, with a particular focus on the norwegian context. from policy rates to short - term market rates banks ’ deposits with the central bank are often referred to as reserves and are banks ’ most liquid assets.

things stand now, the rise in prices will be notably higher than wage growth this year. indebted households will face both higher interest expenses and higher electricity and food prices. many households will be facing a tighter financial situation, and i am fully aware that some of them will also be facing a financial struggle. most households will be able to cope with higher interest rates on their loans. unemployment is very low. many will be able to cut down on other expenses or draw on their savings. chart : monetary policy meeting on 17 august we could have decided to raise the policy rate more gradually. but then we would have run the risk of inflation becoming entrenched at a high level. that would have made it more difficult to bring inflation down and could have required a sharper tightening of monetary policy somewhat further out, increasing the risk of an economic downturn. inflation has surprised to the upside in recent months. this is why the policy rate has been raised somewhat more rapidly than signalled earlier. and the economy might evolve differently from what we have envisaged. the level of uncertainty is high. limited spare capacity in the norwegian economy and persistent external inflationary pressures may lead to inflation accelerating further. on the other hand, the rise in interest rates and high inflation may cool down the housing market and curb household consumption faster than currently envisaged. there is also a risk of a sharper slowdown in global growth. the future path of the policy rate will depend on how the economy evolves. we cannot make any promises about the policy rate. the promise we can make is that we will continue our efforts to fulfil the mandate of keeping inflation low and stable and to promote economic stability. 1 a new set of forecasts was not prepared for the monetary policy meeting on 17 august. updated forecasts will be presented when monetary policy report 3 / 22 is published on 22 september. 3 / 3 bis central bankers'speeches