At this meeting, the Executive Board did not see any clear alternatives to leaving the interest rate unchanged. In reaching its decision, the Executive Board weighed the objective of bringing inflation back to target and of stable inflation expectations against the risk that output growth may eventually be too high.

The objective of monetary policy is consumer price inflation of close to 2½ per cent over time. In the conduct of monetary policy, emphasis is also placed on stabilising output. Inflation has picked up recently in line with the projections in the November Inflation Report, but is still considerably below target. The key rate is therefore low.

The unusually low interest rate implies, on the one hand, that we should exercise caution with regard to further interest rate reductions. On the other hand, the prospect of continued low inflation for a period ahead implies that wide deviations from projected economic developments would be required before interest rates should be increased. On balance, the outlook for inflation and the real economy in Norway is broadly in line with the projections in the November Inflation Report.

The prospect of continued low inflation in Norway also implies that we should lag behind other countries in setting interest rates at a more normal level.

Outlook and risk factors

Since the presentation of Norges Bank's last Inflation Report on 3 November, aggregate demand and output in Norway have developed broadly in line with expectations. Economic developments in Europe and Japan, however, have been weaker than projected. The Norwegian economy is showing solid growth, and there are prospects that growth will remain firm next year, as projected in the Inflation Report. Overall capacity utilisation in the Norwegian economy is increasing.

New information concerning price developments suggests that the rate of inflation is picking up approximately in line with the projections in the Inflation Report.

The Executive Board would place particular emphasis on the following factors:

• Developments in consumer prices are, in isolation, reducing the risk that inflation will linger at a very low level. Underlying consumer price inflation, however, is still considerably below the inflation target. At the same time, in the period since the November Inflation Report, the krone exchange rate has generally been somewhat stronger than assumed in the report. A strong krone exchange rate may curb inflation ahead. The krone exchange rate has, however, now reverted to the level prevailing at the time of the previous monetary policy meeting. Changes in the krone exchange rate must be viewed in the light of wide fluctuations in international foreign exchange markets and considerable variations in the oil price in recent weeks.
• Uncertainty with regard to the international recovery may have increased somewhat. The depreciation of the US dollar may further dampen the upturn in the euro area and in Japan.

Economic developments

The Executive Board has also placed particular emphasis on the following new information that has emerged since the previous monetary policy meeting on 3 November:

• Economic growth slowed in the euro area and in the UK in the third quarter, and has come to a halt in Japan in the past two quarters. In the US, economic growth is continuing, with a moderate upswing in employment. Expectations of a gradual interest rate increase in the euro area have ebbed, while interest rate expectations in the US have shifted slightly upwards.
• The rate of increase in consumer prices and producer prices has moved up in several countries, partly reflecting high oil prices. However, underlying inflation in the euro area and the US remains just below 2 per cent. Inflation expectations, as derived from inflation-linked bonds, are approximately unchanged both in the US and the euro area.
• There have been large fluctuations in exchange rates. The effective exchange rate for the US dollar has depreciated by about 2½ per cent since the beginning of November, while the value of euro has increased by 1¾ per cent.
• Oil prices have shown considerable fluctuations. Primarily as a result of a larger-than-expected increase in oil stocks in the US, spot prices in the oil market fell markedly in December to about USD 37 per barrel, which is about 20 per cent lower than at the time of the previous monetary policy meeting. In euro and Norwegian krone terms, oil prices have declined by almost 25 per cent in the same period. Oil futures prices have been more stable.
• In Norway, inflation has been very low since the beginning of 2004 and through the summer. Inflation edged up in autumn and in November the year-on-year rise in prices, as measured by the CPI-ATE, was 1.0 per cent. The fall in prices for imported goods has slowed markedly, and the rise in prices for domestically produced goods and services has picked up somewhat. Excluding the direct interest rate effect on house rents and changes in day-care rates, underlying inflation can be estimated at 1¼ per cent in November. According to surveys conducted by TNS Gallup, inflation expectations 2 and 5 years ahead were approximately unchanged between the third and fourth quarter of this year.
• The krone exchange rate, as measured by the I-44, has varied, but has been somewhat stronger than assumed in the November Inflation Report. The exchange rate is now close to the level prevailing directly prior to the previous monetary policy meeting.
• Financial market participants in Norway still expect a stable interest rate level through the first half of 2005. The interest rate differential against other countries is expected to remain negative in the period to autumn 2006.
• The goods consumption index has varied more than normally and fell in October. Retail sales statistics, based on VAT payments, show somewhat stronger consumer demand for goods than indicated by the goods consumption index. These statistics only apply up to June. TNS Gallup's expectations indicator for Norwegian households remained at a high level in the fourth quarter, and household credit demand is still exhibiting strong growth. New car registrations picked up markedly in November. Norges Bank's financial market statistics indicate that the fall in household net lending in the first six months of the year continued in the third quarter. This suggests that household demand for goods and services is still rising at a brisk pace.
• Production and capacity utilisation in manufacturing are picking up. Statistics Norway's fourth-quarter investment intentions survey for manufacturing shows that manufacturing investment will increase this year, but decline next year. Major projects in the oil refinery and chemical industries are the main factors behind the increase this year. Investment in the oil and gas sector is expected to pick up further in 2005. Investment is rising in service industries. Commercial building starts picked up further in September, particularly in distributive trades. Credit demand in the enterprise sector has also increased somewhat this autumn. Both traditional merchandise exports and imports are still expanding, but at a somewhat slower pace than through the summer. The slowdown is somewhat more pronounced for imports than for exports.
• According to preliminary figures from Statistics Norway, mainland production increased by 3.5 per cent between the third quarter of 2003 and the third quarter of 2004, primarily as a result of growth in manufacturing and service industries. Employment is still exhibiting moderate growth, and unemployment is showing a slight decline.
• The central government budget deficit for 2004 is now higher than previously assumed, primarily due to a shortfall in tax revenues. In the approved budget, central government expenditure growth is estimated at about 11 per cent in 2004 and 2005, which is somewhat higher than the growth estimate for mainland GDP in value terms.
• The rise in house prices has remained high in recent months. According to statistics from the Norwegian Association of Real Estate Agents, house prices rose by 11.5 per cent in the 12 months to November. Housing starts have edged down, but are still at a relatively high level.
• Information from Norges Bank's regional network indicates continued solid growth in output and demand for all industries. However, growth has slowed somewhat for the export industry and distributive trades in the latter half of the year. Enterprises still express a cautious attitude to new recruitment. Employment is increasing somewhat in the building and construction industry, distributive trades and other services. Enterprises are expecting a moderate increase in investment. For manufacturing, the main picture is that investment is still geared towards enhancing production efficiency, but many enterprises are now also planning to increase capacity. A larger number of enterprises than earlier are reporting that they are increasing prices.

Previous assessments

At its previous monetary policy meeting on 3 November 2004, the Executive Board decided to keep Norges Bank's key rate unchanged at 1.75 per cent. At that meeting, the Executive Board did not see any clear alternatives to leaving the interest rate unchanged.

The Executive Board's assessment was that the economic projections in the November Inflation Report imply a sight deposit rate in the interval 1¼ - 2¼ per cent in mid-March 2005: "Uncertainty as to the effects of previous monetary policy easing and the unusually low interest rate level imply, on the one hand, that we should exercise caution with regard to further interest rate reductions. On the other hand, the prospect of continued low inflation for a period ahead implies that wide deviations from projected economic developments would be required before interest rates should be increased. The prospect of continued low inflation in Norway also implies that we should lag behind other countries in setting interest rates at a more normal level."

Charts - monetary policy meeting (959 kB)
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Charts - monetary policy meeting (183 kB)