The Executive Board's monetary policy decision – background and general assessment
Meeting 6 May 2009
The Executive Board placed emphasis on the following new information that has emerged since the previous monetary policy meeting on 25 March:
- Activity in the global economy continued to contract in the first quarter of 2009. Industrial output fell further in the first months of the year, albeit to a lesser extent in February and March than in January. Growth has picked up in China, and there are signs that other emerging market economies are stabilising.
- The International Monetary Fund (IMF) has further revised down its projections for global growth in relation to the March projections. GDP in advanced economies is now projected to fall by 3.8 per cent in 2009. The IMF expects growth in emerging economies to be 1.6% this year.
- The central banks in the euro area, Australia and Canada have reduced their key rates by 0.25 percentage point. In Sweden, Sveriges Riksbank lowered its key rate by 0.50 percentage point to 0.50 per cent.
- Money market rates abroad have fallen further. Money market premiums in the UK, the euro area and the US have decreased.
- Norwegian money market rates have fallen for most maturities. Over the past five trading days, three-month NIBOR has averaged 2.7 per cent. Premiums in three-month money market rates have fallen, averaging 1.2 percentage points over the past five trading days. In Monetary Policy Report 1/09, money market premiums in the second quarter of 2009 were estimated at 1.2 percentage points.
- The import-weighted exchange-rate (I-44) has depreciated by 1.4 per cent since the previous monetary policy meeting in March. The krone is slightly stronger than expected in Monetary Policy Report 1/09.
- Equity prices have risen both in Norway and abroad. The Oslo Stock Exchange benchmark index has risen by about 14 per cent since the March monetary policy meeting.
- The spot price of Brent Blend oil has averaged USD 50 per barrel in the past five trading days, approximately the same as at the time of the March monetary policy meeting. The average spot price so far this year and oil futures prices for the rest of 2009 have been USD 52 per barrel in the past five trading days.
- The Economist commodity-price index has risen by 4 per cent in XDR (1) terms since the March monetary policy meeting. By the same measure, food prices have increased by 2 per cent. The export price of fresh salmon has fallen by 1 per cent. Industrial metals prices have risen by 8 per cent, while the price of aluminium has increased by 3 per cent. Dry cargo freight rates have increased by 1 per cent in XDR terms.
- The year-on-year rise in the consumer price index (CPI) was 2.5 per cent in March. Adjusted for tax changes and excluding temporary changes in energy prices (CPIXE), consumer prices rose by 2.7 per cent in the year to March 2008, down from 3.0 per cent in February. The CPI adjusted for tax changes and excluding energy products (CPI-ATE) also showed a year-on-year rise of 2.7 per cent in March. Inflation measured by a trimmed mean of the twelve-month rise in the sub-indices of the CPI was 3.0 per cent in March, while a weighted median showed an increase of 3.4 per cent.
- According to house price statistics from the real estate industry, seasonally adjusted house prices rose by 1.5 per cent in April, after increasing by 0.4 per cent the previous month. House prices have fallen by 3.0 per cent since April 2008 and by 5.9 per cent since the peak in June 2007.
- Household spending on goods fell by a seasonally adjusted 0.3 per cent from February to March 2009, after rising by 0.7 per cent in the previous month. Only spending on purchases of private motor vehicles, including fuel, increased from February to March.
- Hotel occupancy rates fell by 11 per cent in the year to February 2009. The decline is due to a lower number of overnight stays in both the business and tourist categories.
- MakroSikt’s Consumer Confidence Index measures consumer confidence and purchase plans in Norway. Consumer confidence rose from -2.2 points in March to -0.3 points in April. The purchase index remained unchanged at -37.1 in the same period.
- According to financial accounts for households and non-profit organisations, household net lending was NOK 5.0 billion in the fourth quarter of 2008, an increase from a negative NOK 26.5 billion in the same quarter one year earlier. Total household net lending in 2008 was a negative NOK 22.3 billion.
- Twelve-month growth in gross private sector indebtedness to domestic sources (C2) was 8.8 per cent in the year to March 2009, down from 9.4 per cent in February. Growth in corporate debt continues to slow, while growth in household debt appears to have stabilised.
- Seasonally adjusted manufacturing production was 3.1 per cent lower in the period December to February than in the previous three-month period. In February, seasonally adjusted production was 7.0 per cent lower than at the peak in April 2008.
- The Norwegian PMI (Purchasing Managers Index) stood at a seasonally adjusted 39.8 in April, up from 38.0 in March. All the sub-indices edged up.
- Statistics Norway’s industrial confidence indicator showed a seasonally adjusted increase from -23 in the fourth quarter of 2008 to -21 in the first quarter of 2009. The indicator is still at a historically low level.
- According to figures from Statistics Norway, the number of bankruptcies rose by 88 per cent in the first quarter of 2009 compared with the same quarter in 2008. However, the level in the first quarter of 2008 was low.
- According to building statistics, the number of housing starts fell by 20.1 per cent in February 2009 compared with February 2008. Measured by utility floor space, the decrease was 29.6 per cent. Non-residential building starts fell by 8.3 per cent in the year to February 2009.
- The value of traditional merchandise exports declined by 14.3 per cent in March 2009 compared with March 2008, while the value of merchandise imports fell by 18.1 per cent in the same period.
- Seasonally adjusted registered unemployment stood at 2.8 per cent in April, up 0.2 percentage point from March. According to Statistics Norway's Labour Force Survey (LFS), seasonally adjusted unemployment was 3.1 per cent of the labour force in February, up from 3.0 per cent in the previous month. Employment fell by 4000, while the labour force contracted by 2000 from January to February.
The current global economic downturn is the deepest in the post-war period. Activity continues to contract, and unemployment is rising sharply. If anything, developments have been weaker than expected, but there are also some signs of improvement. Confidence indicators are still at very low levels, but are no longer falling. Equity prices have risen recently and commodity prices seem to have stabilised. Consumer price inflation continues to slow. Key rates in many countries have been reduced further in order to mitigate the impact of the crisis on activity and prices. In the US, the UK, Switzerland, Sweden, Canada and Japan, key rates are close to zero.
The global recession is having an adverse impact on the Norwegian economy and has resulted in a marked decline in exports. Developments since the March monetary policy meeting have been approximately as expected. Production continues to decline and unemployment is rising. Enterprises are still finding it difficult to obtain funding, and banks report that credit standards for corporate loans are being tightened further. Household expectations concerning developments ahead have improved somewhat and house prices have risen this year. The decline in interest rates is mitigating the impact of the global recession on the Norwegian economy.
Inflation has slowed in line with projections. Underlying inflation is now 2¾ per cent. Lower inflation abroad and lower capacity utilisation in the Norwegian economy will push down inflation ahead. Preliminary results from this year’s wage settlement indicate that wage growth, as expected, will be considerably lower in 2009 than in 2008. There are prospects that inflation will slow and fall below 2.5 per cent. It is therefore appropriate to set the interest rate at a low level to prevent inflation from falling too far below target.
Both the objective of stabilising inflation around the target and the objective of curbing the decline in activity suggest that the interest rate should be low. The strategy in Monetary Policy Report 1/09 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, unless the Norwegian economy is exposed to new major shocks. New information since the March monetary policy meeting does not warrant a deviation from this strategy.
The outlook for the Norwegian economy and the balance of risks indicate that it is now appropriate to reduce the key policy rate by 0.50 percentage point.
The key policy rate is reduced by 0.50 percentage point to 1.50 per cent with effect from 7 May 2009.
1) Special drawing rights, IMF. As of 30 April 2009, XDR 1 = NOK 9.8