The governor of the Bank of Norway (Norges Bank), Svein Gjedrem, has caused controversy with his statements about Norwegian interest rate policy and wage settlements. On 29 March 2001, the government gave the Bank of Norway a mandate to steer interest rates with a view to achieving a low and stable inflation rate, with the target inflation rate set at 2.5% (compared with 3.6% in April 2001). The government's initiative strengthens recent developments towards a more independent role for the Bank of Norway.
In March 2001, the Bank of Norway was given greater independence in setting interest rates, with the aim of achieving an inflation target rate of 2.5%. In May, the governor of the Bank announced a policy of gradual interest rate adjustments in order to reach this target, but also warned that interest rates will be raised if pay settlements generate higher wage growth than is justifiable in the light of the 2.5% target. This statement has caused a degree of controversy among the social partners.
The governor of the Bank of Norway (Norges Bank), Svein Gjedrem, has caused controversy with his statements about Norwegian interest rate policy and wage settlements. On 29 March 2001, the government gave the Bank of Norway a mandate to steer interest rates with a view to achieving a low and stable inflation rate, with the target inflation rate set at 2.5% (compared with 3.6% in April 2001). The government's initiative strengthens recent developments towards a more independent role for the Bank of Norway.
In an article in the Aftenposten newspaper on 28 May 2001, the governor stated that the target rate of 2.5% will be achieved incrementally. However, he said that on certain occasions the Bank of Norway will swiftly and markedly raise the interest rate if the situation so requires - for example, when there is significant turmoil in the financial markets, or when a "bargaining-driven cost crisis indicates that the confidence in monetary policy is threatened". The governor elaborated his views in a speech the next day. He stated that several wage settlements in recent years have generated unjustifiably high wage growth, including those in 1998 (NO9902116F) and 2000 (NO0104128F). Mr Gjedrem further argued that management and white-collar pay increases may also have been influential in generating the high outcomes in general wage settlements for other workers. This may be seen as partial support for the position of the trade unions, which have long been critical of the salary increases among groups not covered by the ordinary wage settlements (NO0104127N).
The governor also stressed that achieving the inflation target of 2.5% depends on a stable use of oil revenues in the Norwegian economy, in order to prevent these funds from fluctuating according to the oil price. Undisciplined spending of the oil revenues would of necessity lead to frequent alterations in the interest rate, and subsequently a generally higher interest rate level. The government has signalled that it will channel the revenue from increasing oil revenues into the Norwegian economy, but that this will happen gradually and cautiously.
The governor's pledge to use the interest rate to compensate for "too high" increases in national wage growth brought some response from the central social partner organisations, though not a major reaction. The newly elected president of the Norwegian Confederation of Trade Unions (Landsorganisasjonen i Norge, LO), Gerd-Liv Valla, commented that it is unwise of the governor to use terms such as "bargaining-driven cost crisis", and insisted that LO will not allow any interference in wage settlements by the Bank of Norway, or by anyone else. Ms Valla emphasised that LO intends to continue to pursue a moderate and responsible wage policy. The Confederation of Norwegian Business and Industry (Næringslivets Hovedorganisasjon, NHO) is more positive to the governor's announcements, and points to the fact that high wage levels have pushed interest rates up, and that an appreciation of the exchange rate contributes to weakening Norwegian industry's competitiveness.
The introduction by the government of an inflation rate target was brought about without much political debate. It is nevertheless clear that a more active role in interest rate policy-making by the Bank of Norway may turn out to be controversial, especially in a transitional period. People still remember the governor's decision to raise interest rates during the ballot among trade union members over the outcome of the 2000 private sector wage settlement (NO0005192F). This move is seen to have influenced the subsequent rejection of the settlement proposal by the union members, with widespread strikes in the LO-NHO bargaining area. The result was that a new settlement was reached, with a cost effect approximately 1% higher than the rejected deal.
Eurofound recommends citing this publication in the following way.
Eurofound (2001), Governor of central bank causes controversy, article.
