Norges Bank projects lower price inflation
In its March Inflation Report, Norges Bank's projection for consumer price inflation is 2¼ per cent in 1999 and 1¾ per cent in 2000. This is a downward revision of a quarter percentage point for both years compared with the December report. The downward revision reflects lower international price inflation and a fall in prices of imported goods.
In a commentary, Central Bank Governor Svein Gjedrem states that in order to achieve exchange rate stability, monetary policy must contribute to bringing price and cost inflation down over time to the corresponding aim for inflation in the euro area. On the other hand, interest rates must not be set at such a high level that this contributes to a recession with deflation.
Norges Bank expects mainland GDP to remain at the 1998 level up to and including 2000, and then edge up in 2001. In some industries, higher costs and low product prices have resulted in reduced profitability. Norges Bank expects that this will gradually translate into lower investment and lower demand for labour. At the same time, petroleum investment will show a sharp fall this year and in 2000. On the other hand, continued growth in household demand will contribute to attenuating the contraction in the business sector.
The Central Bank Governor states that market participants expect a substantial reduction in interest rates over the next year. "Such expectations may find support also in the assessment of the outlook for the Norwegian economy that is presented in the report. In setting interest rates, Norges Bank will pursue a gradualist strategy. Higher-than-expected growth in private consumption or a relaxation of the fiscal stance would generate uncertainty about the inflation outlook," Governor Gjedrem points out.
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