(Bloomberg) -- Norway lowered the central bank’s inflation target after policy makers struggled to meet the goal, going against the grain in a global debate where many have called for levels to be raised to allow more room to support economies.
The government reduced the target to 2 percent from 2.5 percent, bringing it in line with other central banks such as the European Central Bank, the Federal Reserve and Sweden’s Riksbank. The Norwegian krone rose as much as 0.8 percent against the euro as the change paves the way for potentially higher interest rates. It later pared gains.
The decision reflects Norway’s evolution from an economy heavily reliant on oil to one that’s trying to become less dependent on fossil fuels. But the change also coincides with a global struggle to revive inflation after years of record monetary policy stimulus.
Norwegian policy makers, who have signaled they will increase rates later this year, have contended with price growth far below their target since a collapse in the country’s oil industry.
“The period of phasing in oil revenues is now largely behind us,” Finance Minister Siv Jensen said. “There are no longer any compelling arguments for targeting a higher inflation rate than other countries.”
Kari Due-Andresen, chief economist at Svenska Handelsbanken AB, questioned the move, saying it goes against the flow of an international debate in which many are recommending a higher target to ease the danger of approaching zero bound.
“We are surprised that they chose to do this,” she said. “It would have been simple just to keep the target, keeping more in line with international recommendations.”
The ministry also said that inflation targeting shall be “forward-looking” and “flexible” to contribute to “high and stable output and employment” and inserted a phrase to bind the bank to counteract the “build-up of financial imbalances.”
But it removed language about keeping the krone stable. The text was changed because there could be times when swings in the currency are wanted, said Amund Holmsen, director general at the ministry, citing the drop in the krone during the oil crash that started in 2014.
Norges Bank backed the switch, saying it won’t “result in significant changes” and “clarifies the monetary policy mandate and underpins the bank’s flexible approach to inflation targeting.”
Policy makers also dismissed that the changes would be troublesome should it need to fight off an economic slowdown.
“Over time, lower average inflation owing to a lower inflation target will result in a correspondingly lower nominal interest rate,” Governor Oystein Olsen said in a letter. “International experience has shown that the room for manoeuvre in monetary policy is not exhausted when the policy rate is close to zero. In Norges Bank’s assessment, the room for manoeuvre in monetary policy will be sufficient with a 2 percent inflation target.”
Norway is not alone in rethinking its inflation targets. In December, Argentina eased its goal for the next two years to allow for inflation of 15 percent, up from a range of 8 percent to 12 percent.
New Zealand’s government has asked its Reserve Bank to balance its price goal with another aimed at jobs. Former Federal Reserve Chairman Ben S. Bernanke has argued that the Fed’s goal needs a shake up and there is some speculation that new Chairman Jerome Powell will allow for the 2 percent aim to be breached. Sweden’s Riksbank has also changed the variable it looks at recently.
The Bank for International Settlements has argued central banks should consider variables such as asset prices and financial stability.
The potential for a lower target has been discussed for some time as the flow of oil riches abate and Norway’s economy comes more in line with others. To be sure, the oil industry still makes up more almost 20 percent of output.
Read more on inflation target speculation
The krone advanced to its strongest level since the end of January against the euro. The krone traded 0.6 percent higher at 9.5695 versus the common currency as of 11:54 a.m. local time. It has strengthened almost 3 percent against the euro this year, the second-best performance among the Group-of-10 currencies.
This is krone positive, “but for Norges Bank it is not a game changer,” said Joachim Bernhardsen, an analyst at Nordea Bank. “We see it more as an adaption to the current practice.”
Tobias Ogrim, an analyst at SEB AB in Oslo, said the decision should increase the probability of an earlier hike.
“We don’t think they will need to pick up the pace of tightening rapidly as we think they will put emphasis on the flexible inflation target,” he said. “Due to the flexible inflation target, the current rate path signals more hikes than what would have ‘normally’ been the case given the the current trajectory for inflation.”
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