What Is the Normal Interest Rate Level?

Abstract

The normal real interest rate level in Norway is estimated to be in the interval of 2-3 per cent. With an inflation target of 2.5 per cent, the interval for the normal nominal interest rate is 4½-5½ per cent (three-month money market rate). This is a downward revision of half a percentage point from the previously estimated interval. The downward revision is in line with the market’s interest rate expectations and estimates of potential growth. Norges Bank’s Monetary Policy Report 1/2010 assumes a normal real interest rate of 2½ per cent and hence a normal nominal interest rate of 5 per cent. This is the same estimate used in the Bank’s analyses in recent years, but the estimate is now the midpoint of the interval. In both Norway and other countries, it appears that market participants expect roughly the same long-term level of nominal interest rates that prevailed prior to the financial crisis, as measured by implied forward rates.