The Executive Board's monetary policy decision – background and general assessment
Meeting 5 May 2010
The Executive Board has placed emphasis on the following new information that has emerged since the previous monetary policy meeting on 24 March:
- Activity in the US and Asia has been somewhat higher than assumed in the March Monetary Policy Report. The IMF has revised up its global growth forecasts for 2010 from 3.9 per cent in January to 4.2 per cent in April. Labour market conditions in the US and the UK are improving, while unemployment has increased somewhat in the euro area. Capacity utilisation remains low in advanced economies.
- Underlying inflation is still low in many countries. Inflation expectations one year ahead have increased slightly. Long-term inflation expectations remain stable in most advanced economies.
- Key rates remain low in many countries. Market participants expect key rates to be raised in some countries in the coming months, but longer-term expectations have edged down.
- In Australia, the key rate was raised by 0.25 percentage point to 4.5 per cent.
- The euro has depreciated considerably against the US dollar and other currencies.
- Long-term government bond yields have increased considerably in several European countries with fiscal deficits. Yield spreads against German ten-year government bonds have widened by 3.1 percentage points for Greece and 1.2 percentage points for Portugal. For Ireland and Spain the spread increased by 0.8 and 0.4 percentage point, respectively. On 2 May Greece, the IMF and the euro area countries agreed on the conditions for loan of EUR 110 billion over three years.
- Short-term money market premiums in the US have increased marginally in relation to expected key rates. For longer money market rates the spread has increased somewhat more. In addition, the spread between EURIBOR and German paper has increased.
- In Norway, the premium on three-month money market rates so far in the second quarter is 0.1 percentage point higher than assumed in the March Monetary Policy Report.
- The interest rate differential against trading partners is 1.8 percentage points for three-month money market rates.
- The import-weighted exchange rate (I-44) has appreciated by 1.7 per cent. So far in the second quarter the krone exchange rate has been 0.8 per cent stronger than projected in the March Monetary Policy Report.
- US stock indices have remained approximately unchanged, while European stock markets have shown some decline. The Oslo Børs benchmark index remains broadly unchanged. Expected volatility in the US stock market has increased, but is still lower than in autumn 2008.
- The spot price of Brent Blend oil has risen by 13 per cent. In the past five trading days, the spot price has averaged USD 86 per barrel. The Economist commodity-price index has increased by 5 per cent in XDR terms . Dry cargo freight rates have decreased by 2 per cent.
- In the year to March 2010, the consumer price index (CPI) rose by 3.4 per cent. Adjusted for tax changes and excluding temporary changes in energy prices (CPIXE) consumer prices rose by 1.9 per cent. Other indicators of underlying inflation were between 1.7 and 3.5 per cent. Consumer price inflation was broadly in line with the projections in the March Monetary Policy Report.
- In the agreement between the Federation of Norwegian Industries and the Norwegian United Federation of Trade Unions, pay increases and other adjustments result in wage growth of about 1 per cent for manufacturing workers, while wage carry-over through the year contributes a further 1 per cent in addition to the contribution from wage drift through the year. Other private sector wage agreements seem to be consistent with this outcome.
- Revised labour market figures from the Norwegian Labour and Welfare Administration show that unemployment rose at a somewhat slower pace last autumn than previously projected. Seasonally adjusted registered unemployment was 2.9 per cent of the labour force in April, unchanged on March, and around that projected in the March Monetary Policy Report. According to Statistics Norway’s labour force survey (LFS), employment rose by 3000 in the period December to February compared with the three-month period to November 2009.
- Household spending on goods fell by a seasonally adjusted 0.4 per cent between February and March 2010, after falling 0.8 per cent in the previous month. Household spending on goods rose by 0.6 per cent between 2009 Q4 and 2010 Q1. Various confidence indicators measuring consumers’ view of their own financial situation and Norway’s economy are still on the rise.
- According to Norges Bank’s quarterly Survey of Bank Lending, banks reported a further easing of credit standards for enterprises in 2010 Q1. Credit standards for households were tightened somewhat.
- Twelve-month growth in gross domestic debt (C2) in the private and municipal sector was 3.9 per cent in March. Household debt grew by 6.4 per cent. For non-financial corporations, debt is still falling.
- According to financial accounts for households and non-profit institutions, households net lending was negative NOK 12 billion in the 2009 Q4, which is NOK 5 billion below the figure for the same quarter one year earlier. Overall, net lending was negative NOK 13 billion in 2009.
- According to house price statistics from the real estate industry, house prices rose by a seasonally adjusted 0.4 per cent in April, after rising by 1.1 per cent in March. House prices were 3.7 per cent higher in April than at the peak level in June 2007 and had increased by 15.5 per cent since the trough in November 2008. In real terms, house prices are still somewhat lower than the peak in 2007.
- According to building statistics, the number of housing starts was a seasonally adjusted 9 per cent higher in the period December to February than in the three-month period to November 2009. The corresponding figure for other building starts was 18 per cent.
- Manufacturing output increased by a seasonally adjusted 0.8 per cent in February, after falling in the two previous months. According to Statistics Norway’s business sentiment survey for manufacturing and Norges Bank’s regional network, business leaders expect moderate growth in production ahead.
- The value of traditional merchandise exports increased by 4.9 per cent between 2009 Q4 and 2010 Q1. Imports grew by 1.4 per cent in the same period.
The world economy is rebounding, but capacity utilisation is still low in many countries. The labour market is showing signs of improvement in the US and the UK, but unemployment is still rising in the euro area. Oil prices and other commodity prices have increased. Market participants expect key rates in the euro area, US and UK to remain close to zero for a period ahead. Interest rate hikes are expected in some of the smaller countries in the coming months. Uncertainty about government finances in Greece has spread to other European countries and markets. A loan agreement between Greece, euro area countries and the IMF has been concluded, but government securities markets remain turbulent. Euro area growth may prove to be weaker than expected.
In Norway, consumer price inflation has slowed in line with projections. Underlying inflation is now around 2 per cent and is likely to edge down further in the period to summer owing to the krone appreciation over the past year. As capacity utilisation increases and the effects of the krone appreciation unwind, consumer price inflation is projected to gradually move up again.
Growth in the Norwegian economy seems to be picking up in line with projections. Unemployment has moved in line with that projected, but capacity utilisation still appears to be lower than normal. Enterprises in Norges Bank’s regional network expect moderate output growth ahead.
Interest rates are low. House prices are still on the rise and household credit growth remains fairly strong. Tighter bank lending standards for households may contribute to curbing debt growth. Over time, household borrowing may nevertheless increase substantially and saving may decline. The aim of guarding against the risk of future imbalances, that may disturb activity and inflation somewhat further ahead, suggests that the interest rate should be gradually brought closer to a more normal level.
On the other hand, developments in Europe may prove to be weaker than assumed and the turmoil in financial markets may persist. Moreover, the krone may prove to be stronger than projected so that inflation remains low for a long period. The risk of a renewed downturn in Europe may suggest that it would be appropriate to leave the interest rate unchanged at this meeting.
Developments in Europe increase the uncertainty surrounding the outlook for the Norwegian economy. In March, the Executive Board decided that the key policy rate should be in the interval 1½-2½ per cent in the period to the publication of the next Monetary Policy Report on 23 June 2010 unless the Norwegian economy is exposed to new major shocks. The analysis in the March Monetary Policy Report suggests that the key policy rate should thereafter be raised gradually. On balance, prospects and the risk outlook suggest that the key policy rate should be raised at this meeting. As an alternative, the Board considered leaving the key policy rate unchanged.
The key policy rate is raised by 0.25 percentage point to 2 per cent with effect from 6 May.
 Special drawing rights, IMF. As of 30 April XDR 1 = NOK 8.90