The Executive Board's monetary policy decision – background and general assessment
Meeting 4 February 2009
The Executive Board placed emphasis on the following new information that has emerged since the previous monetary policy meeting on 17 December 2008:
- The global economy slowed sharply in the fourth quarter of 2008. There was a marked decline in international trade and a deep and broad-based fall in industrial output in both advanced and emerging market economies.
- The IMF has lowered its global growth forecasts for 2009 and 2010 by 1.7 and 0.8 percentage points respectively in relation to its November forecasts. Global GDP is now projected to increase by 0.5 per cent in 2009. A fall of 2 per cent is expected for advanced economies. Growth forecasts for 2009 from Consensus Forecasts have been revised down by ½ - ¾ percentage point for the largest economies.
- The provision of extraordinary liquidity and a number of measures to support the financial industry have improved conditions in money and credit markets somewhat. A number of banks in many countries have reported far weaker-than-expected results for the fourth quarter of 2008, resulting in renewed concern for the financial sector abroad in recent weeks.
- The central banks in the euro area, the UK and Canada have cut their key rates by 0.50 percentage point. The central banks of Japan, New Zealand and Australia have also reduced their key rates.
- In the UK, Denmark and Sweden, the authorities have launched new measures for the banking sector. In Germany, the authorities have announced plans for an economic stimulus package. The US Senate has approved the release of the remaining USD 350 billion in the Troubled Assets Relief Program (TARP) to support financial markets, and the authorities have provided Bank of America with capital and guarantees against possible losses on the bank’s asset pool. A proposal for an economic stimulus package of USD 816 billion, or close to 6 per cent of GDP for 2009, is now being debated in Congress. The package will be allocated in 2009 and 2010.
- The Norwegian government has proposed changes to the government budget for 2009 in the form of a NOK 20 billion package of measures. In the proposal, the structural non-oil deficit for 2009 is estimated at NOK 118.8 billion, which is equivalent to 5.2 per cent of the capital in the Government Pension Fund – Global. At 2009 prices, the structural deficit will increase by 2.3 percentage points of trend GDP from 2008 to 2009. Including automatic stabilisers, the deficit will increase by 4.9 percentage points from 2008 to 2009. Growth in underlying government expenditure, excluding unemployment benefit, is estimated at a good 10 per cent.
- The price of government debt default insurance has increased recently. Standard & Poor’s has lowered its credit ratings for Greece, Spain and Portugal.
- Equity prices have declined in Norway and abroad. The Oslo Stock Exchange benchmark index has fallen by about 2.0 per cent since the December 2008 monetary policy meeting.
- International money market rates have fallen considerably. Premiums in money market rates continue to edge down.
- In addition to ordinary F-loans, Norges Bank provided extra liquidity before the turn of the year. The Bank also offered dollar liquidity through auctions for banks established in Norway.
- In Norway, money market rates have fallen for all maturities, but have shown wide day-to-day variations. Over the past five trading days, three-month NIBOR has fluctuated between 3.33 and 3.77 per cent. Money market premiums have moved down somewhat for longer maturities. Over the past five trading days, the premium in three-month money market rates has averaged 1.28 percentage points.
- Norwegian banks’ weighted lending rate on new prime residential mortgages has fallen by 1.2 percentage points to 4.8 per cent.
- In Norges Bank’s Survey of Bank Lending for the fourth quarter of 2008, banks reported a continued tightening of credit standards for corporate and household loans. They expected credit standards to remain approximately unchanged for households, while they would tighten further for enterprises. The most important reason for the tightening was the weak economic outlook. The banks also reported lower credit demand from both households and enterprises in the third and fourth quarters of 2008, and they expected a further decline in demand from both groups in the first quarter of 2009.
- The spot price of Brent blend oil has averaged USD 43 per barrel in the past five trading days, which is the same as at the time of the previous monetary policy meeting. Oil futures prices for 2009 have averaged USD 50 per barrel in the past five trading days, i.e. USD 3 lower than at the time of the previous monetary policy meeting.
- After a sharp fall last autumn, The Economist commodity-price index has risen by 12 per cent in XDR terms since the previous monetary policy meeting. By the same measure, food prices have increased by 16 per cent. Prices for industrial metals have edged up, while the price of aluminium has fallen by 4 per cent. Dry cargo freight rates have increased by 37 per cent in XDR terms.
- After depreciating considerably in the second half of 2008, the import-weighted exchange rate has appreciated by 4.1 per cent since the previous monetary policy meeting. The NOK market has been thin and fluctuations in the krone exchange rate have been unusually wide.
- The year-on-year rise in the consumer price index (CPI) was 2.1 per cent in December. Adjusted for tax changes and excluding temporary changes in energy prices (CPIXE), consumer prices rose by 2.8 per cent in the year to December 2008. The CPI adjusted for tax changes and excluding energy products (CPI-ATE), showed a year-on-year rise of 2.6 per cent in December. Inflation measured by a trimmed mean of the twelve-month rise in the sub-indices of the CPI was 2.7 per cent in December, while a weighted median showed an increase of 2.9 per cent.
- Seasonally adjusted registered unemployment stood at 2.3 per cent of the labour force in January, 0.2 percentage point higher than in December. According to Statistics Norway’s Labour Force Survey (LFS), seasonally adjusted unemployment was 2.9 per cent of the labour force in November, up from 2.7 per cent in the previous month. Employment decreased by 1 000, while the labour force expanded by 4 000 in the same period.
- Statistics Norway’s business tendency survey for manufacturing showed a marked decline in the fourth quarter in the composite industrial confidence indicator. The indicator fell to its lowest level since its introduction in 1988.
- Seasonally adjusted manufacturing production was 0.7 per cent lower in the period September-November than in the three preceding months. Production of intermediate goods and capital goods slowed, while production of energy products and consumer goods increased. Working-day adjusted manufacturing production increased by 0.2 per cent in the year to November 2008.
- The Norwegian PMI (Purchasing Managers Index) fell through 2008, but remained unchanged from December to January.
- According to External Trade Statistics, import prices for goods excluding ships and oil platforms rose by 0.4 per cent in NOK terms from the third to the fourth quarter of 2008. Import prices for consumer goods excluding cars rose by 2.9 per cent in the same period. Export prices for traditional goods fell by 6.7 per cent.
- The volume of traditional exports fell by a seasonally adjusted 7.2 per cent from the third to the fourth quarter of 2008. By the same measure, the volume of imports, excluding ships and oil platforms, declined by 10.9 per cent. The value of net exports of traditional goods decreased by a seasonally adjusted 3.3 per cent from the third to the fourth quarter.
- The twelve-month rise in the gross domestic debt of the corporate sector excluding financial undertakings was 14.8 per cent in December 2008, compared with 17.4 per cent in November 2008.
- ForbrukerMeteret (Consumer Confidence Index), which is a monthly survey of household confidence and expectations concerning their own financial situation and the Norwegian economy, showed a clear rise in January in household confidence in their own financial situation.
- Twelve-month growth in household gross domestic debt was 7.1 per cent in December 2008, compared with 7.3 per cent in November.
- According to financial accounts, household net lending was a negative NOK 57.2 billion over the four quarters to the third quarter of 2008. Household net financial assets were NOK 146.8 billion lower in the third quarter of 2008 than in the third quarter of 2007.
- Household spending on goods increased by a seasonally adjusted 0.5 per cent from November to December, after remaining unchanged in the previous month. The volume of retail sales, excluding motor vehicles and petrol, rose by a seasonally adjusted 0.1 per cent in December.
- According to building statistics, the number of housing starts fell by 38.8 per cent in November 2008 compared with November 2007. Measured by utility floor space, the decrease was 32.2 per cent. Non-residential building starts were 40.4 per cent lower in November 2008 than in the same month one year earlier.
- According to house price statistics from the real estate industry, seasonally adjusted house prices rose by 0.8 per cent from December to January, after increasing by 0.3 per cent the previous month. House prices in January 2009 were 6.9 per cent lower than in January 2008.
Global economic growth has weakened further since December. The international downturn seems to be having a broad impact and is likely to be deeper than previously expected. There is a marked decline in international trade. The fall in prices for oil and other commodities appears to have come to a halt, but the rise in consumer prices has continued to slow. Key rates in many countries have been cut to curb the impact of the financial crisis on activity and prices. Market participants expect key rates to be reduced further. At the same time, the authorities in many countries have adopted measures to support the financial sector, which have improved conditions in money and credit markets, and have both increased public expenditure on goods and services and reduced taxes.
Inflation in Norway has moderated in line with our December projections. Underlying inflation is 2¾ per cent. There are prospects that inflation will continue to ease somewhat, but remain close to 2.5 per cent. The krone has recently appreciated, albeit with wide day-to-day fluctuations.
Expectations of low and stable inflation now make it possible to use monetary policy actively to curb the effects of the international downturn on the Norwegian economy. Corporate and household credit growth is slowing, but after stalling in the fourth quarter, the housing market is now showing signs of more stable prices and credit flows to households seem to be improving. Access to funding for the business sector still seems to be difficult. The sharp global downturn will particularly affect export industries and will have ramifications for other Norwegian business sectors. The decrease in interest rates and the new fiscal measures will curb the impact on output and employment.
There is still considerable uncertainty surrounding developments ahead and it is difficult to project the probability of different outcomes. The downturn in the Norwegian economy may be deeper and more prolonged than we have assumed. Inflation may in turn become too low. This would then indicate that the interest rate should be cut further. On the other hand, the key policy rate has already been reduced considerably in order to reduce uncertainty and stave off a particularly adverse outcome for the Norwegian economy. It will take time for the effects of the new, lower interest rate level to become evident. This may in isolation indicate that developments should be monitored over a period before making substantial changes to the key rate.
The analyses published on 17 December suggested a considerable reduction in the key rate in December, with the possibility of further interest rate cuts over the next six months. The Executive Board’s strategy is that the key policy rate should be in the interval 2 – 3 per cent in the period to the publication of the next Monetary Policy Report on 25 March 2009, unless the Norwegian economy is exposed to new major shocks. The outlook for the Norwegian economy and the balance of risks suggest that it is now appropriate to reduce the key policy rate by 0.50 percentage point to 2.50 per cent.
The key policy rate is reduced by 0.50 percentage point to 2.50 per cent with effect from 5 February 2009.