The Executive Board's monetary policy decision – background and general assessment
Meeting 25 March 2009
The Executive Board placed emphasis on the following new information that has emerged since the previous monetary policy meeting on 4 February:
- The sharp and broad-based contraction in economic activity is continuing. GDP figures for the fourth quarter of 2008 show that economic developments in the US, the euro area, Japan and Sweden have been weaker than expected.
- Industrial output in advanced economies, which fell markedly through the fourth quarter, also declined sharply in January. Japan, Sweden and Germany, all of which have substantial export industries, have been particularly hard hit. Industrial output in January in these countries was 31, 22.7 and 20.5 per cent lower respectively than at the same time last year.
- The decline in world trade has also continued into 2009. In Japan export volumes in January were more than 40 per cent lower than in January last year. The fall in Chinese exports gathered pace in February.
- The International Monetary Fund (IMF) has revised down its growth projections for advanced economies considerably compared with the January projections. GDP in advanced economies is now projected to fall by between 3.0 and 3.5 per cent in 2009. Emerging economies are expected to experience growth of between 1.5 and 2.5 per cent.
- The Bank of England and the Bank of Canada have reduced key rates to 0.5 per cent. In the euro area, the ECB lowered its benchmark rate to 1.5 per cent, while in Sweden the key rate was reduced to 1.0 per cent. The Swiss National Bank has reduced its key rate by 0.25 percentage point and is now aiming for a target range for the three-month Libor of 0.25 per cent.
- In several countries where the interest rate is approaching zero, central banks have considered or have already implemented alternative monetary policy measures. In connection with its most recent monetary policy meeting, the Federal Reserve announced that it would increase its market purchases of long-term mortgage-backed securities, and that it would buy government bonds in the amount of USD 300 billion in the course of the next six months. The US authorities have also announced the Public-Private Investment Program, which will purchase loans and securities backed by subprime loans to remove them from banks’ balance sheets. The authorities will contribute USD 75-100 billion from the Treasury's Troubled Asset Relief Program (TARP).
- The Bank of England has also announced that it will purchase securities equivalent to GBP 75 billion over the next three months. The amount will be used to finance purchases of both government bonds and corporate bonds. The Swiss National bank has announced that it will buy bonds issued by private borrowers in addition to intervening in the foreign exchange market by selling Swiss francs.
- Money market rates have continued to fall in Europe. In the US, money market rates seem to have bottomed out and have recently shown little change. Premiums in international money markets are approximately unchanged.
- Over the past five trading days, three-month NIBOR has averaged 3.3 per cent. This is somewhat lower than at the time of the previous monetary policy meeting. Money market premiums have risen somewhat. Over the past five trading days, premiums on three-month money market rates have averaged 1.4 percentage points.
- The import weighted krone exchange rate (I-44) has appreciated by 5.1 per cent.
- The Oslo Stock Exchange benchmark index has risen by about 4.5 per cent since the February 2009 monetary policy meeting.
- The spot price of Brent blend oil has averaged USD 49 per barrel over the past five trading days, which is USD 6 higher than at the time of the previous monetary policy meeting. The average spot price so far this year and futures prices for the remainder of 2009 have been USD 51 per barrel over the past five trading days. This is USD 1 higher than at the time of the previous monetary policy meeting.
- The Economist commodity-price index has fallen by 2 per cent in XDR (1) terms since the previous monetary policy meeting. By the same measure, food prices have fallen by 3 per cent. The export price of fresh salmon has risen by 8.5 per cent since the previous policy meeting. Prices for industrial metals have increased by 6 per cent, while the price of aluminium has risen by 3 per cent. Dry cargo freight rates have increased by 62 per cent in XDR terms, although these rates are still 83 per cent lower than the peak level in 2008.
- The year-on-year rise in the consumer price index (CPI) was 2.5 per cent in February. Adjusted for tax changes and excluding temporary changes in energy prices (CPIXE), consumer prices rose by 3.0 per cent in the year to February 2009. The CPI adjusted for tax changes and excluding energy products (CPI-ATE) also showed a year-on-year rise of 3.0 per cent in February. Inflation measured by a trimmed mean of the twelve-month rise in the sub-indices of the CPI was 3.0 per cent in February, while a weighted median showed an increase of 4.0 per cent.
- Inflation expectations one and two years ahead decreased from the third to the fourth quarter of 2008 according to Perduco’s expectations survey. Inflation expectations five years ahead were approximately unchanged.
- According to house price statistics from the real estate industry, seasonally adjusted house prices rose by 1.9 per cent from January to February after increasing by 1.5 per cent in the previous month. House prices have fallen by 4.9 per cent since February 2008 and by 7.8 per cent since the peak in June 2007.
- Household spending on goods fell by a seasonally adjusted 1.3 per cent from December 2008 to January 2009 after rising by 0.4 per cent in the previous month. Lower purchases of private motor vehicles and fuel pushed down the goods consumption index.
- Car sales to households have fallen considerably since autumn 2008 and were 38.7 per cent lower in February this year compared with the same month in 2008.
- Hotel occupancy rates fell by 7.4 per cent in the year to January 2009. The decline is due to a lower number of overnight stays in connection with courses, conferences and business trips. Overnight stays decreased for both Norwegian nationals and non-residents.
- The number of passengers at Norwegian airports declined by 10.7 per cent in the year to February 2009. The year-on-year rise in the number of passengers has been negative for seven consecutive months. The year-on-year rise has not been as low since 2002.
- TNS Gallup’s trend indicator, which measures households’ assessments of and expectations with regard to their own financial situation and the Norwegian economy, decreased from -7.9 points in the fourth quarter of 2008 to -11.1 points in the first quarter of 2009.
- Twelve-month growth in gross private sector indebtedness to domestic sources (C2) was 9.7 per cent in January, down from 10.1 per cent in December 2008. Both enterprises and households contributed to the decline.
- Norges Bank’s regional network contacts reported in the most recent round of interviews that output is continuing to fall at the same pace as in the previous round. The strongest decline is in retail trade and manufacturing for the domestic market. The contacts expect output to fall at approximately the same pace ahead as in the past three months. The contacts also reported that capacity utilisation is showing a pronounced decline.
- Seasonally adjusted manufacturing production was 2.8 per cent lower in the period November-January than in the previous thee-month period. In January, production was 6.6 per cent lower than at the peak in April 2008.
- The Norwegian PMI (Purchasing Managers Index) stood at a seasonally adjusted 36.4 in February, down from 41.4 in January. The index was pushed down in particular by expectations concerning employment. New orders remained low.
- According to the investment intentions survey for oil and gas production including pipeline transport, total investment in 2009 is estimated at NOK 137.4 billion at current prices, or a rise in value terms of 5.6 per cent compared with the estimate for 2008 presented at the same time last year. Manufacturing investment in 2009 is estimated at NOK 25.2 billion, or NOK 0.4 billion higher than estimated in the fourth quarter of 2008 and 19.8 per cent higher than estimated for 2008 at the same time last year.
- According to building statistics, the number of housing starts fell by 14.2 per cent in January compared with January last year. Measured by utility floor space, the decrease was 13.7 per cent. Non-residential building starts were 19.7 per cent lower in January than in the same month one year earlier.
- Seasonally adjusted registered unemployment stood at 2.6 per cent in February, up 0.3 percentage points from January. The number of registered unemployed was 63 899, while 12 385 were on labour market programmes. According to Statistics Norway's Labour Force Survey (LFS), seasonally adjusted unemployment was 3.0 per cent of the labour force in December, up from 2.9 per cent in the previous month. Both employment and the labour force continued to expand in December.
- Preliminary quarterly national accounts figures show that mainland GDP fell by a seasonally adjusted 0.2 per cent from the third to the fourth quarter of 2008 at market prices.
- According to order statistics for manufacturing, the value of new orders decreased by 31.0 per cent in the year to the fourth quarter of 2008. The value of order reserves fell by 5.7 per cent in the same period. Both order reserves and new orders declined compared with the previous quarter. New orders in export and domestic markets have fallen at approximately the same pace over the past year.
- The value of merchandise exports, excluding oil and gas, declined by 19.7 per cent in February 2009 compared with the same month one year earlier. The value of metal exports fell by 37 per cent in the same period. The value of merchandise imports fell by 16.4 per cent.
- The package of measures presented by the Government in January 2009 was deliberated in the Storting (Norwegian parliament) on 13 February. Changes in taxation were made in the original Government proposal that will reduce government revenues by NOK 1.5 billion. Government expenditure, primarily related to higher upper limits on guarantees to the fishing industry, was increased by NOK 133 million. All in all, the structural non-oil deficit in the approved budget is estimated at NOK 120.5 billion.
It appears that the global downturn will be deeper and more prolonged than previously assumed. Total output has fallen markedly in many countries. Inflation is slowing sharply and inflation expectations have fallen. Central bank key rates have been cut in many countries to mitigate the impact of the crisis. Government authorities the world over are taking action to boost demand for goods and services, improve banks’ financial strength and enable credit markets to function. It will nevertheless take time for global growth to pick up.
It also appears that the decline in activity in the Norwegian economy will be more pronounced than previously assumed. The export industry is being severely affected by the sharp global downturn, which will have repercussions on other Norwegian business sectors. Households have lowered their expectations concerning developments ahead, but the downward trend in expectations has slowed. The enterprises in Norges Bank’s regional network are expecting output and employment to fall further over the next six months. Unemployment is still low, but is rising rapidly. The decline in interest rates and strong growth in general government expenditure will mitigate the impact on output and employment in Norway.
The rise in prices has been sharper than expected, particularly for imported consumer goods. The strong fall in the value of the krone last autumn has probably fed through to prices more rapidly than usual. Underlying inflation is now approximately 3 per cent. Lower global inflation and lower capacity utilisation in the Norwegian economy will curb inflation ahead. There are prospects that inflation will fall more rapidly than previously assumed and be below 2.5 per cent for a period. It is therefore appropriate to set the key policy rate at a low level to prevent inflation from falling too far below target.
The analysis in Monetary Policy Report 1/09 suggests that the key policy rate should be reduced further. The Executive Board’s strategy is that the key policy rate should be in the interval 1-2 per cent in the period to the publication of the next Report on 17 June 2009, unless the Norwegian economy is exposed to new major shocks.
The risk of a pronounced downturn in the Norwegian economy indicates that the interest rate should be rapidly reduced. On the other hand, we have already made substantial cuts in the key policy rate, and it will take time for the effects of the decline in interest rates to pass through fully into the economy. A low interest rate may result in a more rapid turnaround in Norway than we assume. These factors suggest a gradual change in the interest rate or that further interest rate reductions should be put on hold.
New information may reveal aspects of economic developments that indicate that the Norwegian economy is moving on a different path than projected. Private consumption may pick up more quickly and deleveraging in the household sector may be more limited than expected. A more rapid turnaround or a weaker krone may, on the one hand, result in higher-than-projected inflation. The key policy rate may then be set higher than currently envisaged. On the other hand, inflation may be lower than projected if the krone appreciates markedly or the global downturn is even deeper and more prolonged. In this case, even stronger measures may be necessary.
An overall assessment of the outlook and the balance of risks suggests that it is appropriate to reduce the key policy rate by 0.50 percentage point.
The key policy rate is reduced by 0.50 percentage point to 2.00 per cent with effect from 26 March 2009.
1) Special drawing rights, IMF. As of 24 March 2009, XDR 1 = NOK 9.6.