The Executive Board’s monetary policy decision - background and general assessment
Meeting 12 December 2007
The Executive Board placed emphasis on the following new information that has emerged since the previous monetary policy meeting on 31 October:
- Risk premiums in international money and credit markets have increased. Some money market rates are considerably higher than central bank key rates. In Norway, interest rates on loans with maturities longer than one week are markedly higher than market expectations as to the key policy rate. According to forward pricing in the fixed income market, market participants expect premiums to be reduced after summer 2008. This autumn, bank lending rates have probably been raised somewhat more than developments in the key rate would imply.
- The central bank in Australia has raised its key rate, while the central banks in the US, Canada and the UK have lowered their key rates.
- Equity prices have fallen, and the market has lowered key rate expectations. Growth in the global economy is still solid, but is showing signs of slackening in several countries, particularly the US. At the same time, the growth outlook is still very favourable in emerging economies such as China and India.
- The spot price of Brent Blend oil is now about USD 88 per barrel. Total petroleum production on the Norwegian continental shelf fell by 5.3 per cent in the period from January to September compared with the same period last year.
- The import-weighted krone exchange rate has depreciated by about 1.6 per cent.
- The year-on-year rise in the consumer price index (CPI) was 1.5 per cent in November. Adjusted for tax changes and excluding energy products, the twelve-month (or year-on-year) rate of increase in consumer prices (CPI-ATE) was also 1.5 per cent in November. The rise in prices measured by a trimmed mean of the twelve-month rise in the sub-indices in the CPI was 1.9 per cent in November, while a weighted median showed a rise of 1.6 per cent.
- According to TNS Gallup’s expectations survey for the fourth quarter, expectations regarding the rise in prices one, two and five years ahead had increased among the social partners and economists in the financial industry and academia compared with the previous quarter.
- Preliminary quarterly national accounts figures show that mainland GDP adjusted for seasonal patterns rose by 1.9 per cent from the second to the third quarter, measured at market prices. Excluding electricity production, growth was 1.6 per cent. Measured at basic prices, growth excluding electricity production was 1.1 per cent.
- In the final central government budget bill for 2007, the surplus on the central government budget and the surplus for the Government Pension Fund are estimated to total NOK 397 billion this year. The non-oil deficit is estimated at NOK 3 billion, which is NOK 51 billion lower than in the approved budget for 2007. The reduction is largely due to an increase in revenues from activity in the mainland economy. The estimate for the central government’s net cash flow from petroleum activities has been revised down by NOK 45 billion, primarily as a result of lower petroleum production in 2007 than previously assumed.
- In November, seasonally adjusted registered unemployment fell to 1.7 per cent, its lowest level since 1987. According to Statistics Norway’s labour force survey (LFS), seasonally adjusted unemployment rose to 2.6 per cent in September (the three-month period August-October). Employment increased by 11 000, and the labour force by 13 000.
- According to preliminary figures from Statistics Norway’s wage index, average growth in monthly wages was 5.1 per cent from the third quarter of 2006 to the third quarter of this year. Wage growth per normal person-year was 5.6 per cent in the same period. Among contacts in Norges Bank’s regional network, annual wage growth for this year is estimated at 5½ per cent. TNS Gallup’s expectations survey for the fourth quarter showed that wage growth expectations in 2007 and 2008 were higher than in the preceding quarter among the social partners.
- Seasonally adjusted manufacturing output rose by 1.1 per cent in the period August to October compared with the three preceding months. The value of new manufacturing orders was 22 per cent higher in the third quarter of this year than in the same period one year earlier. In the investment intentions survey for the fourth quarter, manufacturing investment for 2007 is estimated at NOK 27.2 billion at current prices.
- According to the investment intentions survey for oil and gas production, including pipeline transport, total investment for 2007 is estimated at NOK 112.5 billion, which implies value growth of 18 per cent between 2006 and 2007.
- According to order statistics for the building and construction industry, the value of new orders increased by 2 per cent between the third quarter of 2006 and the third quarter of 2007. The figures show a decline in new orders for residential construction but continued growth for the commercial building industry. The value of the total stock of orders increased by 15 per cent in the same period, although the statistics indicate that growth in the building industry is slowing.
- Contacts in Norges Bank’s regional network report that growth is still high in all industries, although it has slackened since earlier this autumn. Several industries report that capacity constraints have limited growth and will limit growth next year. Labour in particular is in short supply. Prices have risen at a steady pace over the past twelve months, particularly in the building and construction industry, and the rise in prices is the highest recorded in the network. The rise in prices is expected to accelerate in retail trade and household services, while a more subdued rise in prices is expected for other goods and services.
- Twelve-month growth in the gross domestic debt of non-financial enterprises was 19.1 per cent in October. The money supply increased by 25.5 per cent in the same period.
- Preliminary institutional sector accounts figures showed that the household saving ratio excluding dividend income was -3.0 per cent over the past four quarters. Twelve-month growth in household gross domestic debt was 11.6 per cent at end-October.
- TNS Gallup’s trend indicator, which measures households’ assessments and expectations concerning their financial situation and the Norwegian economy, fell somewhat from the third to the fourth quarter. Although the indicator has now fallen for three consecutive quarters, the level remains high. According to Statistics Norway, household spending on goods rose by 10.5 per cent in the year to October 2007.
- House price statistics from the real estate industry show that seasonally adjusted house prices continued to fall in November. The year-on-year rise slowed to 3.8 per cent.
Total consumer price inflation (CPI) is still low, but has been higher than projected. Inflation has picked up markedly as a result of a sharp increase in electricity prices, and is expected to show a further rise. Underlying consumer price inflation is now between 1½ and 2 per cent. In Monetary Policy Report 3/07, CPI inflation adjusted for tax changes and excluding energy products (CPI-ATE) was expected to pick up gradually to around 2 per cent in the latter half of 2008.
Since the beginning of November, the turbulence in money and credit markets has heightened and the outlook for the world economy has become more uncertain. House prices in Norway have fallen this autumn. Short-term money market rates are considerably higher than expectations concerning key rates would imply. These factors suggest, in isolation, that the key policy rate should be kept unchanged.
On the other hand, growth in the Norwegian economy has been more robust than expected. Demand for labour is rising rapidly, and the labour force is continuing to expand. Household consumption has increased more than expected. Our regional network confirms the picture of continued solid growth in the Norwegian economy, even though many enterprises now report that capacity constraints will limit growth ahead and that they expect higher prices for consumer goods and services. A higher interest rate may gradually reduce capacity utilisation so that inflation will not become too high.
Given the inflation target, we will be mindful of the effects of higher interest rates on the krone exchange rate when inflation is low. The krone has fluctuated somewhat this autumn, probably as a result of the turbulence in financial markets. In the past month, the krone has depreciated somewhat against most currencies, although it is still stronger than in the first half of 2007.
The strategy in Monetary Policy Report 3/07 is that the key policy rate should be in the interval 4¾-5¾ per cent in the period to the publication of the next Report on 13 March 2008, unless the Norwegian economy is exposed to major shocks. Keeping the key policy rate unchanged is an alternative, but an overall assessment indicates that it is appropriate to raise the key policy rate now.
The Executive Board decided to increase the key policy rate by 0.25 percentage point to 5.25 per cent with effect from 13 December 2007.
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