The goal of monetary policy as conducted by Norges Bank is to maintain low and stable inflation. The operational target of monetary policy is explicitly defined in a consumer price inflation rate of approximately 2.5 percent over time. Norges Bank sets its interest rate instrument with a view to achieving the inflation target over a two-year horizon, and it will normally tolerate deviations of actual inflation from target that are not in excess of plus or minus 1 percentage point. In general, the direct effects on consumer prices resulting from changes in interest rates, taxes, excise duties, and extraordinary temporary circumstances shall not be taken into account.Monetary policy - Norway ; Banks and banking, Central - Norway ; Norges Bank

Giovanni P. Olivei

English

Research Papers in Economics

Giovanni P. Olivei
Economist, Federal Reserve Bank of
Boston.
giovanni.olivei@bos.frb.org
Norway’s Approach 
to Monetary Policy
T
he goal of monetary policy as conducted by Norges Bank is to main-
tain low and stable inflation. The operational target of monetary
policy is explicitly defined in a consumer price inflation rate of
approximately 2.5 percent over time. Norges Bank sets its interest rate
instrument with a view to achieving the inflation target over a two-year
horizon, and it will normally tolerate deviations of actual inflation from
target that are not in excess of plus or minus 1 percentage point. In gener-
al, the direct effects on consumer prices resulting from changes in interest
rates, taxes, excise duties, and extraordinary temporary circumstances
shall not be taken into account.
The inflation target was introduced in March 2001, after a long tradi-
tion of exchange rate targeting. After abandoning a fixed-rate regime in
1992, Norges Bank conducted a managed float of the krone, with no
explicit stipulation of a central rate and fluctuation margins. Norges Bank
had no obligation to intervene in the foreign exchange market, but, in the
event of significant changes in the exchange rate, the Bank would orient
its instruments with a view to returning the exchange rate over time to its
initial range. In practice, this meant that Norges Bank conducted mone-
tary policy with the aim of bringing inflation toward the level of other
European trading partners. Thus, the move to an explicit inflation target
did not bring significant changes in the conduct of monetary policy.46 Second Quarter 2002 New England Economic Review
Norges Bank’s Main Monetary Policy
Instruments
While in many other countries the central bank
sets the interest rate on liquidity supplied through
open market operations and thereby signals the mar-
ket rate it deems appropriate, Norges Bank has decid-
ed not to signal interest rates in this way. The policy
rates are in fact the rates on Norges Bank’s standing
facilities, that is, banks’ interest rate on sight deposits
in Norges Bank (deposit rate) and the interest rate on
overnight loans to banks (overnight lending rate). The
deposit rate and the overnight lending rate form a cor-
ridor for the shortest money market rates. 
The difference between the overnight lending rate
and the sight deposit rate is kept at 2 percentage points
on an annual basis. In recent years Norges Bank has
supplied liquidity in a way such that the banking sys-
tem as a whole has sight deposits with the central
bank.1 Thus, the sight deposit rate is the banking sys-
tem’s marginal rate and the key policy rate in the
Bank’s conduct of monetary policy. In normal times,
money market rates will be close to the prevailing
sight deposit rate. 
It is, as mentioned, the inflation outlook two years
ahead that determines the sight deposit rate set by
Norges Bank. In normal times, the Bank takes a gradu-
alist approach when changing the policy rate. 
Standing Facilities
Banks can automatically deposit any available liq-
uidity within Norges Bank, which is remunerated at
the posted sight deposit rate. Banks can also borrow
liquidity during the day and overnight from Norges
Bank. No interest or fees are charged on intraday
loans, while overnight loans carry an interest rate (the
overnight lending rate) which is, as mentioned, 2 per-
centage points above the posted sight deposit rate.
Access to the intraday and overnight lending facility is
automatic, and since June 2001 Norges Bank has
ceased to set semi-monthly total drawing limits for
overnight loans. 
For both intraday and overnight loans, usually
referred to as D-loans, banks must post collateral in an
amount equivalent to 100 percent of the loan. The eli-
gible collateral for D-loans is identical to the collateral
Norges Bank requires for loans the Bank issues in open
market operations (F-loans), described below. 
Norges Bank also has an extraordinary intraday
borrowing facility, introduced to provide for the exe-
cution of special payment settlements specified by
Norges Bank. No collateral is required for such loans,
referred to as E-loans, but a fee is charged to deter
banks from drawing on this facility.2
Open Market Operations3
Norges Bank aims at maintaining a stable supply
of liquidity in the banking system. Specifically, the
Bank ensures that the banking system has sight
deposits in Norges Bank of a size sufficient to keep the
shortest money market rates down toward the sight
deposit rate. Since the central government’s working
account is in the central bank, the liquidity position of
banks can change rapidly, making it necessary for the
Bank to intervene frequently in the market.
The main instruments for money market opera-
tions are fixed-rate loans (F-loans) that Norges Bank
issues against collateral when the banking system has
a liquidity deficit. The rates on F-loans are set by auc-
tion. As of September 1999, F-loans carry a 100 percent
collateral requirement. The 100 percent collateral
requirement on F-loans was the culmination of a
decade-long process of gradual reintroduction of the
principle of full collateral for loans granted by Norges
Bank.4
Financial instability in the late 1980s was respon-
sible for the reversal in Norges Bank’s attitude
toward securing the liquidity supplied to the money
market. Until then, the collateral requirement had
undergone a process of gradual relaxation. Norges
Bank first allowed access to its lending facility to
banks with securities in their portfolios but did not
require the securities to be deposited. Then, in 1986,
the collateral requirement was altogether removed
from the regulation.
The introduction of 100 percent collateral on F-
loans in 1999 is directly linked to the unsuccessful
1 The Norwegian system operates without reserve require-
ments. Banks are subject to the requirement that liquid assets must
be at least 6 percent of the individual bank’s liabilities.
2 E-loans may be granted for cash withdrawals and for curren-
cy trading with Norges Bank. E-loans must be repaid on the same
day they are issued. In the event of repeated use of E-loans, Norges
Bank may order a bank to increase its collateral, reduce its exposure
in special payment settlements, or decide that the bank may not
have access to participate in specific settlements. 
3 This section draws on Norges Bank Economic Bulletin (1999/4),
pp. 396–400.
4 Norges Bank first introduced limitations on access to its
fixed-rate lending facility, and subsequently required collateral for
overnight loans. Since September 1995, the collateral requirement for
overnight loans has been 100 percent. Intraday loans, established in
1997, now also require full collateral.Second Quarter 2002 New England Economic Review 47
experience of the repo facility. The repo facility was
introduced in 1996 with the goal of replacing unse-
cured F-loans. To encourage the use of the facility by
market participants, the repo rate was set at a dis-
count on the F-loan rate. Still, the bidding was mod-
est. Initially, benchmark government bonds were the
only securities permitted. The outstanding stock of
Norwegian Government securities is limited, and
banks traditionally do not hold large portfolios of
government paper. Insurance companies, which had
large holdings of government paper, were not
allowed by regulation to enter the repo market. While
in 1999 the repo scheme was extended to include all
securities eligible as collateral for loans extended by
Norges Bank, because of practical considerations the
pool was effectively restricted to government securi-
ties and benchmark bonds issued by Norges
Kommunalbank.5 This aspect, and the inability to
include counterparties other than banks, limited the
effectiveness of the repo facility as a means to enhance
the distribution of liquidity in the money market.6
Since the repo facility did not displace unsecured
F-loans, Norges Bank opted for a full collateral
requirement on F-loans. The repo facility is still opera-
tional, but it has not been used since September 1999.
The reliance on F-loans over repos is likely due to
practical issues. The eligible collateral for F-loans and
D-loans is in fact the same, and the securities provided
as collateral are pooled, making it unnecessary to ear-
mark specific securities for a given type of loan. To
mop up liquidity, Norges Bank may invite fixed-rate
deposits (F-deposits) with a specified maturity. As for
F-loans, the maturity ranges from 1 to 10 days. In 1997,
Norges Bank allowed trading of F-deposits between
banks, as well as repurchases of F-deposits by the
Bank prior to maturity. Occasionally, Norges Bank
relies on currency swaps as an additional tool for open
market operations. Toward the end of 2000, for exam-
ple, Norges Bank entered into currency swaps agree-
ments to curb the effect on interest rates of the poorly
functioning interbank market at that time. 
Eligible Collateral 
F-loans, D-loans, and repos have identical eligible
collateral. As Table 1 shows, in order to ensure that the
system functions in a satisfactory manner, the selection
of eligible securities is very broad. The small size of the
Norwegian government bond market is the main rea-
son for the broad selection of eligible collateral. Norges
Bank has established a rating system for the securities
used as collateral for loans in Norges Bank. Rules for
reduction in a security’s collateral value are based on
the rating the security receives in terms of its interest
rate risk, credit risk, and currency risk. Credit risk is
considered to be zero for government and government-
guaranteed issuers in OECD member states. Higher
perceived credit risk on the part of the issuer will result
in greater reductions to collateral value. All securities
denominated in a currency other than Norwegian kro-
ner will be subject to a reduction for currency risk. As
Table 1 shows, the reductions are applied to the nomi-
nal value of the security. In the near future, Norges
Bank intends to shift to a mark-to-market pricing of col-
lateral, so as to improve the balance between the collat-
eral furnished and the actual risk assumed.7
Investment of Assets
At the end of 2000, the market value of Norges
Bank’s net foreign exchange reserves (less foreign lia-
bilities and net foreign exchange sold forward) was
168 billion Norwegian kroner, which is almost 60 per-
cent of the Bank’s total assets.8 Foreign exchange
reserves are divided into four sub-portfolios: an
immunization portfolio to match government foreign
currency debt and neutralize the currency and interest
rate risk associated with this debt; a buffer portfolio
for the Government Petroleum Fund, to accumulate
foreign currency purchases for transfers to the Fund at
regular intervals; a liquidity portfolio, to be used in the
foreign exchange market in connection with the con-
duct of monetary policy; and a long-term portfolio,
which is to be available for interventions, but to be
invested with a view toward achieving a high return in
the long term. The long-term portfolio constitutes the
largest portion of foreign exchange reserves, with in
excess of 100 billion Norwegian kroner. While reserves
5 See Norges Bank Economic Bulletin (1999/4), p. 398.
6 The Norges Bank Act did not stipulate limitations regarding
counterparties in open market operations, but this interpretation
was questioned and Norges Bank used banks as the only counter-
parties. However, in December 1999, section 21 of the Norges Bank
Act was amended by explicitly stating that Norges Bank may enter
into repurchase agreements with counterparties other than banks.
7 So far, this solution has been impeded by the lack of neces-
sary systems at Norges Bank. Norges Bank will continue until fur-
ther notice to calculate the loan value in terms of the nominal value,
with the exception of unit trusts that invest only in Norwegian gov-
ernment and government-guaranteed securities. The loan value is
calculated on the basis of redemption value for unit trusts. See
Norges Bank Economic Bulletin (1999/4), pp. 399–400.
8 Total assets here are defined net of the Government Petro-
leum Fund, which the Bank manages on behalf of the Ministry of
Petroleum and Energy. 48 Second Quarter 2002 New England Economic Review
in the liquidity portfolio are invested in fixed-income
instruments only, about 20 percent of the long-term
portfolio is invested in equities. As concerns fixed-
income instruments, the long-term portfolio has a
longer duration and a broader country distribution
than the liquidity portfolio. The main strategic choices
for both the liquidity and the long-term portfolio are
defined by means of benchmark portfolios with given
country distribution and specific securities for the var-
ious markets. Limits are set for how much the manag-
er can deviate from the benchmark portfolio.
Selected Fiscal Issues
Fiscal policy has been generally effective in dis-
charging its countercyclical role. In a March 2001 white
paper to the Parliament, the Norwegian government
set the following guidelines for fiscal policy: (1) Con-
siderable emphasis must be placed on stabilizing eco-
nomic fluctuations, and (2) Petroleum revenues will be
gradually phased into the economy, at a pace in line
with the estimated 4 percent real return on the capital
of the State Petroleum Fund (SPF). 
The Norwegian authorities aim for a sustainable
long-run fiscal position through accumulating assets
in the SPF during the period of peak production, so
that when oil and gas revenues decline, a sufficient
buffer fund will be available to finance rising age-
dependent expenditures. In Norway’s fiscal strategy,
the SPF is to be used as a means to insulate the budg-
et from the effects of short- and long-term changes in
petroleum revenues. During the ongoing period of
high oil production, this means that surplus petrole-
um revenues are transferred to the SPF, where they
are used to acquire financial assets. To help minimize
any tendency toward appreciation of the real
exchange rate during the period of fiscal and external
Table 1
Securities Accepted as Collateral for Loans Extended by Norges Bank
a
Collateral security Value
1. Bonds and certificates issued or guaranteed by Norwegian  If denominated in Norwegian kroner: 
government or other OECD member state that has not  95% of face value.
renegotiated foreign debt in the last five years. 
(Banks must apply to have foreign securities considered  Other: Must be denominated in euros or other eligible 
as collateral.)  currency. Subject to currency risk haircut.
2. Ownership interests in securities funds, which are restricted  95% of face value.
to investing in Norwegian government-issued and 
guaranteed bonds and certificates.
3. Bonds and certificates issued or guaranteed by Norwegian  90% of face value.
municipalities, counties, state enterprises, and mortgage 
companies.
4. Units in unit trusts whose statutes limit investment to (3).
5. Domestic private bonds and bills—must satisfy certain  Dependent on credit rating of issuer 
eligibility criteria, although no absolute rating  (value less than 90% of face value).
requirement. VPS-registered bonds and money-market 
funds may be also furnished as collateral.
6. Foreign private bonds and bills (issued by OECD member 
states and satisfying minimum credit rating requirements).
Not accepted as collateral
Securities issued by another entity within the same 
financial group as the bank.
Bank certificates.
a All securities that are eligible as collateral for loans in Norges Bank can also be used as underlying securities for repurchase agreements with
Norges Bank.
Source: Norges Bank, Economic Bulletin, 99/4.Second Quarter 2002 New England Economic Review 49
surpluses, the funds accumulated in the SPF are
invested entirely in foreign-currency-denominated
assets abroad. The rate of accumulation of assets
depends on the amount of fiscal surpluses transferred
into the SPF, the timing of transfers, and the rate of
return on investment.
The cyclically adjusted non-oil budget balance net
of interest payments has improved substantially since
1993. The government budget position is currently in
deficit when one excludes net oil revenues. Given that
most of the oil revenues are invested abroad, the high
government surpluses inclusive of oil revenues have
only partially been used to reduce the level of out-
standing government debt. The government has long-
term fiscal challenges similar to those facing most
other OECD countries, such as population aging and
increased social security spending when the baby
boom generation retires. What makes Norway differ-
ent is the government’s considerable wealth in terms
of oil, other energy resources, and net financial assets.
Generational accounting methods usually suggest a
relatively small generational imbalance between pres-
ent and future generations.9
9 The generational accounting method was discussed and
applied in the National Budget 1995, the annual economic policy doc-
ument of the Norwegian government. Since then, generational
accounting has been used by the government on a regular basis to
assess the long-run fiscal balance.
References
Gerlach, Stefan. 1997. “Monetary Policy Issues in the Nordic
Countries after 1992.” In Monetary Policy in the Nordic Countries:
Experiences Since 1992. Basel: Bank for International Settlements. 
International Monetary Fund. 2000. Norway: Staff Report for the 1999
Article IV Consultation. Washington, DC: IMF.
Nicolaisen, Jon and Jan F. Qvistad. 1997. “Monetary Policy in
Norway.” In Monetary Policy in the Nordic Countries: Experiences
Since 1992. Basel: BIS.
Norges Bank. Annual Report. Norges Bank, various issues. 
__________. Economic Bulletin. Norges Bank, various issues.
The author thanks Kristin Gulbrandsen of Norges Bank for
helpful comments and suggestions. The author is solely
responsible for any errors.

Monetary Policy in Norway.” In Monetary Policy in the Nordic Countries: Experiences Since

Monetary Policy Issues in the Nordic Countries after

Norway: Staff Report for the 1999 Article IV Consultation.

Norway's approach to monetary policy

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Norway's approach to monetary policy

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