Norges Bank (NB) operates a so-called flexible inflation mandate that allows Governor Øystein Olsen to work towards both bringing inflation close to the long-term target of 2.5% and stabilising growth and employment.
The severe NOK depreciation over the past 12 months has impacted imported inflation faster and more forcefully than has previously been the case, in turn driving core inflation higher than NB's target rate and making many market observers ask how low Norwegian interest rates can go.
On several occasions, however, and most recently at its monetary policy meeting in September, NB has demonstrated that it is willing to accept a temporary inflation spike, because the growth outlook puts downward pressure on price levels not only directly, but also indirectly by reducing wage growth prospects.
"Therefore, monetary policy has become the first line of defense against weakening growth, as a lower level of interest rates stimulates investment and private consumption, while also supporting the competitive strength of Norwegian exporters by way of a weaker currency", says Danske Bank.
