Norway's Inflation Target in Doubt as Lawmakers Fight Adjustment

(Bloomberg) -- Confusion ensued after a Norwegian parliamentary committee voiced its opposition to the Finance Ministry’s decision to lower the central bank’s inflation target.

The Christian Democrats joined the center-left opposition in the Finance Committee to ask the government to look at its decision again. Kjell Ingolf Ropstad, a lawmaker for the Christian Democrats, softened the significance of the vote, telling newspaper Dagens Naringsliv that while parliament has given its opinion, the final say is with the government.

The majority on the committee argued that a rapid adjustment to a lower target would lead to higher interest rates and a stronger krone, hurting jobs. It also said that given Norway’s considerable oil wealth it might be good to have aim for a higher price level and that the lower target will reduce flexibility for the central bank.

Norway's Inflation Target in Doubt as Lawmakers Fight Adjustment

The news came as a shock and the Finance Ministry was caught off guard. Analysts were also unsure what ramifications the decision might have.

“It’s startling that they are meeting resistance on this,” said Kari Due-Andresen, chief economist at Svenska Handelsbanken in Oslo. “It could hurt the confidence in the new target when we see this level of hesitation.”

The target was lowered in March this year to 2 percent from 2.5 percent after policy makers had struggled to meet the goal. The reduction brings it in line with other central banks such as the European Central Bank, the Federal Reserve and Sweden’s Riksbank.

Contrary to the committee’s reasoning, part of the government’s argument was that a lower target would over time bring Norwegian rates in line with its competitors, reducing pressure on the currency.

The government’s decision was also questioned at the time since it went against the flow of an international debate in which many are recommending a higher target to ease the danger of interest rates hitting zero.

Government Responds

The central bank has said that the target change would have little practical impact in the short term since inflation has held closer to 2 percent than 2.5 percent for a long time.

Finance Minister Siv Jensen pushed back against the parliament’s proposal. The changes to the inflation target brings policy in line with current practice, which has contributed to a rapid decline in unemployment, she said.

“The task of setting the guidelines for monetary policy is according to the Central Bank Act delegated to the government,” she said in an emailed statement.

Rigmor Aasrud, the Labor Party’s ranking member on the finance committee, said on Wednesday that the committee is aware that setting the regulations is up to the government, but is “counting on” the ruling coalition to take heed of the majority on the issue.

“This could have been avoided if the government had consulted with parliament beforehand,” she said. Unemployment has to play a greater role in setting the inflation target, she said.

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