The Executive Board's monetary policy decision – background and general assessment
Meeting 17 June 2009
The Executive Board placed emphasis on the following new information that has emerged since the previous monetary policy meeting on 6 May:
- The fall in global economic activity continues. GDP figures for the first quarter show that developments in Europe and Japan have been weaker than expected. Confidence indicators for the corporate and household sectors indicate that the fall in activity is moderating.
- Industrial output in Japan and the UK increased in both March and April. Industrial output in Germany fell again in April. The rate of decline in industrial output has moderated in many other advanced economies. In China and some other emerging market economies, there are indications that growth is picking up again.
- The European Central Bank (ECB) has reduced its key rate by 0.25 percentage point.
- Global money market rates have continued to fall. Money market premiums have decreased in the US, the euro area and the UK.
- Norwegian money market rates have also fallen. Over the past five trading days, three-month NIBOR has averaged 2.2 per cent. Money market premiums have edged down for most maturities and are lower than expected.
- Longer-term government bond and swap rates have risen considerably both in Norway and abroad.
- The import-weighted exchange-rate (I-44) has depreciated by 1.3 per cent since the previous monetary policy meeting in May.
- Global equity markets have shown little change since the previous monetary policy meeting. The Oslo Stock Exchange benchmark index has risen by about 10 per cent.
- The spot price of Brent Blend oil has averaged USD 70 per barrel in the past five trading days, approximately USD 18 higher than at the time of the May monetary policy meeting. Oil futures prices for 2010 have been USD 77 per barrel in the past five trading days. OECD oil stocks were 7.5 per cent higher at the end of April than in the same month one year earlier. OPEC spare production capacity has more than doubled in the past year.
- The Economist commodity-price index has risen by 12 per cent in XDR (1) terms since the May monetary policy meeting. By the same measure, food prices have also increased by 12 per cent. The export price of fresh salmon has risen by 3 per cent. Industrial metals prices have risen by 17 per cent, while the price of aluminium has increased by 9 per cent. Dry cargo freight rates have almost doubled in XDR terms since the May monetary policy meeting.
- The year-on-year rise in the consumer price index (CPI) was 3.0 per cent in May. Adjusted for tax changes and excluding temporary changes in energy prices (CPIXE), consumer prices rose by 2.8 per cent in the year to May 2009, up from 2.7 per cent in April. The CPI adjusted for tax changes and excluding energy products (CPI-ATE) showed a year-on-year rise of 2.9 per cent in May. Inflation measured by a trimmed mean of the twelve-month rise in the sub-indices of the CPI was also 2.9 per cent in May, while a weighted median showed an increase of 3.9 per cent.
- Inflation expectations one to two years ahead were fairly stable from Q1 to Q2 according to Perduco’s expectations survey. Inflation expectations five years ahead edged up.
- According to house price statistics from the real estate industry, seasonally adjusted house prices rose by 1.3 per cent from April to May, after increasing by 1.7 per cent the previous month. House prices have fallen by 1.2 per cent since May 2008 and by 4.4 per cent since the peak in June 2007. Rental prices for high-profile premises in central Oslo have fallen by 20 per cent since November 2008 according to the Dagens Næringsliv property index. Rental prices for centrally located high-standard premises have declined by 7 per cent in the same period. Rental prices in Stavanger, Bergen and Trondheim are also falling, although not as sharply as in Oslo.
- According to quarterly national accounts, household spending fell by a seasonally adjusted 0.2 per cent from 2008 Q4 to 2009 Q1. Spending on goods declined, but spending on services increased. Household spending on goods increased by a seasonally adjusted 0.9 per cent from March to April 2009, after a decrease of 0.9 the previous month. The increase was related to purchases of private means of transport and fuel in addition to other goods such as clothing, shoes and furniture.
- Hotel occupancy rates in Norway, in the business and tourist categories, fell by 5.2 per cent in the year to March and April 2009.
- MakroSikt’s Consumer Confidence Index measures consumer confidence and purchase plans in Norway. According to the Consumer Confidence Index for May, a marginal majority of consumers gave a positive assessment. In April, a marginal majority of consumers gave a negative assessment. The index for purchase plans also rose somewhat.
- TNS Gallup’s trend indicator measures households’ assessments of and expectations with regard to their own financial situation and the Norwegian economy. A reading below zero indicates a majority of households with a negative assessment of the outlook. The trend indicator rose from -8.3 points in 2009 Q1 to -3.7 points in 2009 Q2.
- Preliminary figures from Statistics Norway’s institutional sector accounts showed that household nominal disposable income excluding share dividends was 8.1 per cent higher in the past four quarters up to the end of 2009 Q1 compared with the same period one year earlier. The household saving ratio excluding dividends in the four-quarter period to the end of 2009 Q1 was 2.1 per cent, up from 0.3 per cent in 2008 Q4.
- Twelve-month growth in gross private sector indebtedness to domestic sources (C2) was 8.0 per cent in the year to April 2009, down from 8.8 per cent in March. Growth in corporate debt continues to slow, while growth in household debt has been stable in recent months.
- Enterprises in Norges Bank’s regional network reported in the latest round of interviews in April that output has continued to fall, albeit less sharply than in the previous period. The enterprises expect the decline in both output and employment to continue, although at a more moderate pace. An extra round of telephone calls to a limited selection of enterprises in May indicates that they are now seeing the effects of increased public sector demand in building and building-related sectors. In retail trade, there were signs that demand for some consumer durables has increased somewhat.
- According to the investment intentions survey for oil and gas production including pipeline transport for 2009 Q2, total investment in 2009 is estimated at NOK 145.2 billion at current prices, or a rise in value terms of 9.4 per cent compared with the estimate for 2008 presented at the same time last year. The investment estimate for 2010 is 16.4 per cent higher than the estimate for 2009 presented at the same time last year.
- According to the investment intentions survey for manufacturing for 2009 Q2, manufacturing investment in 2009 is estimated at NOK 24.5 billion, or NOK 21 per cent lower than the estimate for 2008 presented at the same time last year. Manufacturing investment in 2010 is estimated at NOK 17.2 billion, a decrease of 14 per cent on the survey figures for 2009. The survey figures show considerable growth in energy sector investment from 2009 to 2010.
- Seasonally adjusted manufacturing production was 2.8 per cent lower in the period February-April than in the three preceding months. Working-day adjusted manufacturing production was 10.6 per cent lower in April compared with the peak in April 2008.
- The Norwegian PMI (Purchasing Managers Index) measures changes in activity in Norwegian manufacturing based on monthly surveys among purchasing managers in the manufacturing sector. The seasonally adjusted PMI level was 41 in May, up from 39.3 in April. All the sub-indices edged up. A PMI level below 50 still indicates a fall in activity.
- According to building statistics, the number of housing starts fell by 15.8 per cent in March 2009 compared with March 2008. Measured by utility floor space, the decrease was 9.1 per cent. The average monthly registration delay for housing starts was 5.5 months in March. Non-residential building starts fell by 19.7 per cent in the year to March 2009.
- According to order statistics for manufacturing, the value of new orders decreased by 29 per cent from 2008 Q1 to 2009 Q1. The value of order reserves fell by 19.3 per cent in the same period. Both order reserves and new orders declined compared with the previous quarter. New orders have fallen considerably more in the export market than in the domestic market.
- External trade statistics show that import prices for goods excluding ships and oil platforms declined by 2.5 per cent in NOK terms from 2008 Q4 to 2009 Q1. Prices for traditional goods exports fell by 7.1 per cent.
- The volume of traditional goods exports decreased by a seasonally adjusted 4.0 per cent from 2008 Q4 to 2009 Q1. By the same measure, the volume of goods imports excluding ships and oil platforms fell by 6.0 per cent.
- The value of goods imports excluding ships and oil platforms was 13.6 per cent lower in the period January-May this year than in the same period in 2008. The value of exports excluding crude oil, natural gas and condensates in the period January-May 2009 fell by 18.6 per cent compared with the same period in 2008.
- Preliminary quarterly national accounts figures show that mainland GDP fell by a seasonally adjusted 1.0 per cent from 2008 Q4 to 2009 Q1 at market prices.
- Seasonally adjusted registered unemployment stood at 2.8 per cent in May, up 0.1 percentage point from April. According to Statistics Norway's Labour Force Survey (LFS), seasonally adjusted unemployment was 3.2 per cent of the labour force in March, up from 3.1 per cent in the previous month. Employment increased by 1 000 and the labour force expanded by 4 000 from February to March.
- In the Revised National Budget for 2009, the structural, non-oil budget deficit is estimated at NOK 130 billion. This is 5.7 per cent of the Government Pension Fund – Global. Nominal growth in underlying general government expenditure is estimated at 10.8 per cent.
The decline in the global economy continues. The situation is serious in Europe in particular. At the same time, there are some indications of renewed growth in China and other emerging market economies, and housing markets in some countries are showing signs of stabilising. Global inflation is slowing. Key interest rates are close to zero in many countries. Money and credit markets have improved and short-term interest rates have fallen both in Norway and abroad.
Monetary policy in Norway is oriented towards consumer price inflation over time of close to 2.5 per cent. Overall inflation has been broadly in line with projections. Underlying inflation is now 2.8 per cent. It appears that wage growth will be considerably lower in 2009 than in 2008. Lower global inflation and lower capacity utilisation in the Norwegian economy will curb inflation ahead. There are prospects that inflation will fall below 2.5 per cent in the course of autumn 2009.
Production in the Norwegian economy has declined as expected so far this year. Unemployment is rising, albeit somewhat less than expected. House prices and equity prices have risen and it is easier for households to obtain loans than last autumn. At the same time, commercial property prices continue to fall and business investment is declining markedly. Oil sector investment, on the other hand, seems to be maintaining a relatively high level.
The analysis in Monetary Policy Report 2/09 indicates that the key policy rate can remain close to 1 per cent in the period ahead. The Executive Board’s strategy is 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.
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. A gradual adjustment of the minimum price in the swap arrangement will be appropriate as the situation in money and credit markets improves and banks have had the opportunity to increase core Tier 1 capital through the Norwegian State Finance Fund. Banks can then increasingly revert to funding sources in money and bond markets.
Money market premiums are expected to fall further. Money market rates may therefore continue to decrease through autumn. Banks’ earnings requirements, competition for deposits and developments in banks’ funding costs indicate that neither bank deposit rates nor bank lending rates will decrease as much as money market rates. On the other hand, the fall in money market rates may have an impact on short-term funding costs for the corporate sector.
New information may reveal aspects of economic developments that indicate that the Norwegian economy is moving on a different path than projected. A more rapid turnaround or a weaker krone may 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 proves to be even deeper and more prolonged than expected. In this case, even stronger measures may be necessary.
An overall assessment of the outlook and the balance of risks suggests that it is now appropriate to reduce the key policy rate by 0.25 percentage point.
The key policy rate is reduced by 0.25 percentage point to 1.25 per cent with effect from 18 June 2009.
1) Special drawing rights, IMF. As of 15 June 2009, XDR 1 = NOK 9.9