Charts - monetary policy meeting (pdf, 147 kB)

Economic developments have been broadly in line with the projections in the Monetary Policy Report published in March. The Norwegian economy is still in an upturn and booming. Consumer price inflation has been somewhat higher than expected, but has primarily been fuelled by prices that show wide monthly variations. As expected, cost inflation seems to be on the rise. 

The key policy rate has been raised by 2¼ percentage points to 4 per cent since summer 2005. Consumer price inflation is lower than the inflation target, but there are prospects that inflation will gradually pick up. Economic growth is buoyant but, on balance, new information since the previous monetary policy meeting does not warrant a departure from the monetary policy strategy presented in March. According to the strategy in Monetary Policy Report 1/07, the key policy rate should lie in the interval 4 - 5 per cent in the period to the publication of the next report on 27 June, conditional on economic developments that are broadly in line with projections. The key policy rate will be increased gradually so that we can assess the effects of interest rate changes and other new information on economic developments. The Executive Board considered the alternative of increasing the interest rate at today’s meeting, but decided that it was appropriate to leave the key policy rate unchanged.

Outlook and risk factors

Underlying inflation was fairly stable for a long period and has been estimated at between 1 and 1½ per cent. Various indicators of underlying inflation were in the upper end of this interval in March. A majority of enterprises in our regional network now expect a faster rise in prices over the next twelve months than in the previous twelve months. In Monetary Policy Report 1/07, CPI inflation was projected to fall markedly in spring and remain low in the period to autumn, primarily reflecting the fall in electricity prices from the high levels prevailing in 2006. As the effect of lower electricity prices unwinds and cost inflation rises, inflation is likely to pick up. Adjusted for tax changes and excluding energy products, underlying inflation is projected to rise gradually through the year.

In the Report, it was pointed out that major shifts in import patterns, weaker global growth, stronger domestic competition, sustained higher productivity growth or a stronger krone exchange rate may result in lower-than-expected inflation. On the other hand, capacity utilisation, output and employment have increased markedly over the past year, which may result in a faster-than-projected increase in prices and costs.

Since the publication of the latest Report, new information shows somewhat stronger growth in Europe and China, but slightly weaker growth in the US. Many enterprises in our regional network report that prices for goods imported from Asia have increased. Provided that the krone exchange rate does not prove to be considerably stronger than assumed in the Report, domestic and external price developments indicate that the risk of a new and sustained fall in prices for imported consumer goods has diminished. At the same time, the first results of this year’s wage negotiations are consistent with projections published in March.

Economic developments

The Executive Board has placed emphasis on the following new information since the previous monetary policy meeting on 15 March:

• Global growth remains strong. In the US, the uncertainty surrounding the state of the economy and particularly the housing market has increased. At the same time, there are signs that economic growth in the euro area and China is stronger than expected earlier.
• The situation in international financial market has stabilised since the turbulence prevailing at the end of February and the beginning of March. Equity prices have advanced and the decline has been reversed.
• Oil prices have edged up. Futures prices for delivery at end-2008 have now reached USD 71, compared with USD 66 around the previous monetary policy meeting.
• The European Central Bank and the central banks in the US, Japan, the UK and Sweden have held monetary policy meetings and left their official policy rates unchanged.
• Interest rate hikes are expected in several other countries in the period to autumn 2007. Both short-term and long-term interest rate expectations have increased among our trading partners. In the US, market participants expect interest rate cuts in the latter half of the year. In Norway, interest rate expectations have increased, particularly one year ahead.  
• The import-weighed krone exchange rate has appreciated by 0.5 per cent.
• The year-on-year rise in the consumer price index (CPI) was 1.1 per cent in March, i.e. an increase of 0.3 percentage point on the previous month. Inflation adjusted for tax changes and excluding energy products (CPI-ATE) was 1.5 per cent. Inflation measured by a trimmed mean of the rise in the sub-indices in the CPI was 1.4 per cent, the same rate of increase as measured by a weighted median.
• The Confederation of Norwegian Enterprise and the Norwegian Confederation of Trade Unions/Confederation of Vocational Unions have finalised this year’s wage settlement. The outcome includes a general hourly pay increase of NOK 2.50 and an additional hourly increase of NOK 1 for low-income groups. The Federation of Norwegian Commercial and the Service Enterprises and Norwegian Confederation of Trade Unions/Confederation of Vocational Unions have negotiated wage settlements that under most agreements imply a general hourly pay increase between NOK 2.50 and 3.50.
• Seasonally adjusted, registered unemployment fell by 0.1 percentage point to 2.0 per cent of the labour forces between February and March. As measured by Statistics Norway’s labour force survey (LFS), seasonally adjusted unemployment declined to 2.7 per cent of the labour force in the period December 2006 to February 2007. In the same period, the number employed increased by 18 000.
• Manufacturing production increase by a seasonally adjusted 1.3 per cent in the three months to February, compared with the previous three-month period. Growth in debt and liquid assets remains very high for the enterprise sector.  
• Information from Norges Bank’s regional network shows continued solid growth in demand and production. Commercial services have shown the strongest rate of growth, but growth is also vigorous in manufacturing and the construction industry. Market prospects for the next six months are positive even though growth is widely expected to slow somewhat. A lack of spare capacity is one of the main factors behind the expectations of slower growth. Wage growth is expected to be markedly higher than in the beginning of 2006. Expectations have shown a particularly strong increase in retail trade and the construction industry, compared with 2006. The enterprises in the regional network report a pronounced increase in prices for inputs and commercial services and expect a faster rise in selling prices. 
• Household consumption of goods is growing at a fast pace. Unadjusted, the retail trade index was 7.2 per cent higher in February 2007 than in the same month one year earlier, partly reflecting a high level of car sales. Statistics from the real estate industry show a 17.5 per cent rise in house prices between March 2006 and March 2007, down from 18.6 per cent in February. House price statistics from the Oslo Housing and Savings Society shows a faster year-on-year rise between February and March. According to building statistics, housing starts increased by 21.4 per cent in the first two months of the year, compared with the same period one year earlier. Household debt accumulation remains high.