The Executive Board's monetary policy decision – background and general assessment
Meeting 12 August 2009
The Executive Board places emphasis on the following new information that has emerged since the previous monetary policy meeting on 17 June:
- Activity in both the US and Europe has fallen at a markedly slower rate. In Japan, activity appears to have picked up. Growth in China has accelerated and growth has resumed in several other emerging market economies.
- There are signs of improvement in the US and UK housing markets among others.
- Confidence indicators in advanced economies have moved up, indicating manufacturing growth in some countries.
- Inflation, as measured by the year-on-year change in consumer prices, shows a continued downward tendency in most countries and is now negative in a number of countries such as the US, the euro area, Sweden, Japan and China. Core inflation is more stable, but has also edged down slightly recently. In China and Japan, consumer prices excluding food and energy are also drifting down.
- The Swedish central bank has reduced its repo rate by 0.25 percentage point to 0.25 per cent.
- Market pricing indicates that further interest rate cuts are not expected in major advanced economies. However, market participants expect an upward shift in central bank key rates in several countries around the turn of the year.
- Long-term interest rates have increased in many countries. Both improved macroeconomic figures and performance gains at a number of banks have contributed to the increase. In addition, an increase in US government bond issues is driving up yields.
- International money market rates have continued to fall. Premiums have declined. Short-term money market premiums are close to normal, while for longer maturities they remain fairly high.
- Money market rates in Norway have also moved down. Over the past five trading days, the three-month NIBOR averaged 1.8 per cent. Money market premiums have declined somewhat further than assumed in the previous Monetary Policy Report.
- The cost of funding in credit markets remains high, but the premiums on 5-year bank bonds have declined by 34 basis points since mid-June to 108 basis points on 5 August. This is the lowest level witnessed since 3 September 2008. According to Norges Bank’s bank lending survey, banks do not expect a further tightening of lending standards for enterprises in the third quarter of 2009.
- The import-weighted krone exchange rate (I-44) has appreciated by 0.5 per cent. So far in the third quarter, the exchange rate is 95.7 - slightly weaker than assumed in Monetary Policy Report 2/09.
- Equity prices have risen both in Norway and abroad. The Oslo Stock Exchange benchmark index has advanced by around 5.4 per cent.
- The spot price of Brent blend oil averaged USD 74 per barrel over the past five trading days, or about 4 per cent higher than at the time of the previous monetary policy meeting in June. Futures prices for delivery in 2010 were USD 80 per barrel over the past five trading days. OECD oil stocks were 13 per cent higher at the end of June than one year earlier. OPEC spare production capacity has more than doubled over the past year.
- The Economist commodity-price index is at about the same level as at the time of the previous monetary policy meeting, measured in XDR (1). Food prices have fallen by 6 per cent. Industrial metals prices have increased by 15 per cent. In the same period, dry cargo freight rates fell by 24 per cent.
- The year-on-year rise in the consumer price index (CPI) was 2.2 per cent in July. Adjusted for tax changes and excluding temporary changes in energy prices (CPIXE), consumer prices rose by 2.5 per cent in the 12 months to July this year. Adjusted for tax changes and excluding energy products (CPI-ATE), the year-on-year rise in consumer price inflation was 2.5 per cent in July. Measured by a trimmed mean of the 12-month rise in the sub-indices in the CPI, inflation was 2.8 per cent in July, while a weighted median showed a rise of 3.4 per cent. Overall inflation since the previous Monetary Policy Report has been approximately in line with that expected.
- According to house price statistics from the real estate industry, seasonally adjusted house prices rose by 1.4 per cent in July, after increasing by 1.3 per cent the previous month. House prices have risen by 3.1 per cent since July 2008 and have fallen by 1.7 per cent since the peak in June 2007.
- Household spending on goods fell by a seasonally adjusted 2.1 per cent from May to June 2009, following a rise of 1.5 per cent the previous month. The sales volume in retail trade excluding motor vehicles fell by a seasonally adjusted 2.5 per cent in June, after an increase of 1.7 per cent the previous month.
- Hotel occupancy rates fell by 3.1 per cent in the year to June 2009. The decrease was mainly due to a decline in the tourist category.
- MakroSikt’s Consumer Confidence Index, which measures consumer confidence and purchase plans in Norway, rose from 2.7 points in May to 6.7 points in June. The index had not been that high since December 2007.
- Twelve-month growth in gross private sector indebtedness to domestic sources (C2) was 6.5 per cent in the year to June 2009, down from 7.5 per cent in May. Growth in corporate debt continues to slow, while growth in household debt has been stable in recent months.
- Twelve-month growth in the money supply (M2) was 3.5 per cent in June, down from 4.0 per cent the previous month.
- Seasonally adjusted manufacturing production was 3.0 per cent lower in the second quarter of 2009 than in the first quarter. Working-day adjusted manufacturing production was 10.1 per cent lower than in June 2008.
- The Norwegian PMI (Purchasing Managers Index) stood at a seasonally adjusted 49.7 in July, up from 48.6 in June.
- According to building statistics, the number of housing starts fell by 23.1 per cent in May 2009 compared with May 2008. Measured by utility floor space, the decrease was 19.4 per cent. Other building starts fell by 25.8 per cent in the same period. The average monthly registration delay for building starts was about 5 months in May.
- The volume of traditional goods exports increased by a seasonally adjusted 0.7 per cent from the first to the second quarter of 2009, while the volume of traditional goods imports fell by 1 per cent. Export and import prices for traditional goods fell by 1.3 and 2.7 per cent respectively from the first to the second quarter.
- Second-hand car imports and new car registrations showed a decline of 7.3 per cent in the year to July 2009.
- Unemployment is lower than expected. Seasonally adjusted registered unemployment stood at 2.8 per cent in July, unchanged from June. According to Statistics Norway's Labour Force Survey (LFS), seasonally adjusted unemployment was 3.1 per cent of the labour force in May. Employment increased by 3 000, while the labour force expanded by 4 000 from April to May.
Activity in the US and Europe has fallen at a markedly slower rate. At the same time, growth in China and other emerging market economies has picked up. Confidence indicators for manufacturing remain weak, but suggest that growth may gradually pick up in some advanced economies. Global consumer price inflation is slowing and consumer prices are falling in the US, the euro area, China and Japan. Key rates have been set close to zero in many countries in order to mitigate the impact of the crisis on activity and price developments.
The situation in money and credit markets has improved and risk premiums have fallen both in Norway and abroad. The swap arrangement whereby banks can exchange covered bonds (OMF) for government securities has made a substantial contribution to ensuring banks’ access to long-term funding. Norges Bank has increased the minimum price in the swap arrangement somewhat and this phasing out of the arrangement is intended to continue through autumn. Surplus liquidity in the banking system is decreasing, indicating that banks no longer see the need for the same level of reserve liquidity as previously.
Monetary policy is oriented towards consumer price inflation over time of close to 2.5 per cent. On balance, inflation has been broadly in line with projections. Underlying inflation is now around 2½ per cent. Although it appears that wage growth will be considerably lower in 2009, firms’ costs may nonetheless remain high due to low productivity growth in the business sector. Low price and cost inflation among Norway’s trading partners is contributing to a stronger real krone exchange rate. There are prospects that inflation in Norway will edge down further through autumn 2009.
The global recession is affecting the Norwegian economy. Production has decreased. Banks have tightened credit standards for enterprises. Corporate and housing investment is declining. There are nonetheless signs of improvement in some sectors of the Norwegian economy. Household consumption seems to be increasing approximately as projected. House prices and equity prices are rising. Growth in government expenditure is high. Employment has held up and unemployment has been lower than expected.
The crisis in the global economy is not over. Even though the situation in financial markets now seems to be stabilising, experience indicates that new shocks can quickly trigger a reversal. Many countries are still in a downturn. In Europe in particular, there are so far few signs of an imminent recovery. In Norway, there are signs of renewed growth. It is nonetheless too early to determine whether the business cycle has turned. On the whole, developments do not at present warrant a change in the interest rate.
Norges Bank’s Executive Board decided in June that the key policy rate should be in the interval ¾ - 1¾ per cent in the period to the publication of the next Monetary Policy Report on 28 October 2009 unless the Norwegian economy is exposed to new major shocks. Risk premiums have fallen substantially. New information may also suggest that production and employment may slow less sharply than expected. These tendencies are still uncertain and new figures may change the picture, but should these developments continue, it may be appropriate to increase the interest rate earlier than projected in the previous Monetary Policy Report.
The key policy rate is kept unchanged at 1.25 per cent.
1) Special drawing rights IMF. On 11 August: 1 XDR = NOK 9.67