The Executive Board's monetary policy decision – background and general assessment
Meeting 13 August 2008
The Executive Board placed emphasis on the following new information that has emerged since the previous monetary policy meeting on 25 June:
- Inflation has continued to pick up in many countries. At the same time, inflation expectations have receded somewhat from the high levels prevailing in July.
- Economic growth in the US has picked up somewhat, but the outlook ahead remains weak. At the same time, growth has slowed markedly in the euro area, the UK and Sweden. In China, India and other emerging market economies, economic growth is still high, but slowing.
- Equity prices have fallen in Norway and abroad. The Oslo Stock Exchange benchmark index is now about 13 per cent lower than at the end of June.
- Central bank interest rates have been raised in Sweden and the euro area. Market participants now expect lower central bank rates among Norway’s trading partners than they did in June. Central bank rate expectations one to two years ahead have fallen in particular. Nonetheless, market participants expect the Swedish central bank to raise its official interest rate in September, and that the Federal Reserve will increase the federal funds rate somewhat around the turn of the year. Market participants expect central bank rates to be lowered in the euro area and the UK in the first half of 2009.
- Premiums for Norwegian and European three-month money market rates have declined somewhat. US money market premiums have increased, and the Federal Reserve has taken further action to strengthen liquidity in the money market. Premiums for the longest money market rates are edging up.
- The Federal Reserve and the US government have taken extensive action to support the home loan mortgage corporations Fannie Mae and Freddie Mac. They own or guarantee about 40 per cent of the US mortgage market.
- Oil prices fell somewhat in summer, but are still high. The spot price of Brent Blend oil is USD 110 per barrel. The futures price for delivery in 2009 is USD 116 per barrel.
- The Economist commodity-price index has decreased by 9.6 per cent, measured in XDRs (1), albeit from a high level. By the same measure, food prices have fallen by 12.4 per cent, industrial metals prices by 5.3 per cent and the price of aluminium by 8.6 per cent. Dry cargo freight rates have fallen by 24 per cent in XDR terms.
- The import-weighted krone exchange rate has depreciated. The average so far in the third quarter is 2.1 per cent weaker than assumed in Monetary Policy Report 2/08.
- The spot price of electricity is currently 39 øre per KWh, i.e. 43.5 per cent higher than the week before the previous monetary policy meeting. Forward prices for electricity for the remainder of 2008 and 2009 have fallen somewhat since the previous monetary policy meeting.
- The year-on-year rise in the consumer price index (CPI) was 4.3 per cent in July. Adjusted for tax changes and excluding temporary changes in energy prices (CPIXE), consumer prices rose by 3.4 per cent over the past 12 months. Adjusted for tax changes and excluding energy products (CPI-ATE), consumer price inflation was 2.9 per cent. Measured by a trimmed mean of the 12-month rise in the sub-indices in the CPI, inflation was 3.8 per cent in July, while a weighted median showed a rise of 3.6 per cent.
- External trade statistics show that prices for traditional export goods in NOK terms rose by 0.5 per cent from the second quarter of 2007 to the second quarter of 2008. Prices for imported goods, excluding ships and oil platforms, rose by 0.2 per cent in the same period.
- The export volume of traditional goods fell by a seasonally adjusted 0.1 per cent from the first to the second quarter of 2008. The import volume for goods, excluding ships and oil platforms, fell by 2.1 per cent in the same period.
- In July, seasonally adjusted registered unemployment stood at 1.5 per cent, unchanged from the previous month. According to Statistics Norway’s Labour Force Survey, seasonally adjusted unemployment was 2.5% in May (in the three-month period April-June), up from 2.4 per cent in the previous month. Employment increased by 1000, and the labour force expanded by 2000 from April to May. In the period to July this year, the number of Norwegian non-nationals with a work permit issued by the Norwegian Directorate of Immigration rose by 23 600 compared with 24 900 at the same time last year.
- Manufacturing production increased by a seasonally adjusted 3.7 per cent in the period April-June compared with the previous three months. Statistics Norway’s business tendency survey for the second quarter of 2008 confirms continued growth in production volume, order reserves and manufacturing employment, while capacity utilisation is declining. The overall expectations indicator showed a fall from the first to the second quarter of this year.
- The Norwegian PMI (Purchasing Managers Index) has fallen since May, but edged up between June and July as a result of higher production and new orders.
- Non-financial enterprises’ gross domestic debt rose by 20.9 per cent in the year to June 2008. Corresponding growth in the money supply was 5.2 per cent in the same period. Norges Bank’s lending survey shows that banks continued to tighten lending standards on loans to non-financial enterprises in the second quarter of 2008. In particular, lending standards on commercial real estate loans were tightened. Banks expect a further tightening of lending standards on business and household loans in the third quarter. Business and household credit demand is expected to slow in the same period.
- Household gross domestic debt increased by 9.8 per cent in June compared with the same month one year earlier. Household gross domestic debt increased at an annualised rate of 8.1 per cent in the period April-June compared with the previous three months.
- According to preliminary financial accounts figures for households and non-profit organisations, household net lending came to NOK 19.4 billion in the first quarter of 2008. Summed over the past four quarters, net lending was negative NOK 67.5 billion compared with negative 83.2 billion in 2007.
- Household spending on goods rose by 0.2 per cent between April and May adjusted for normal seasonal variations, after falling by 0.3 per cent between March and April. Goods consumption has remained virtually unchanged since autumn 2007.
- Building statistics show that housing starts in square metres fell by 21.6 per cent in the year to May 2008. Starts of buildings other than dwellings fell by 12.2 per cent, with non-residential building starts declining by 6.7 per cent.
- According to house price statistics from the real estate industry, house prices fell by a seasonally adjusted 0.7 per cent between June and July. This was the fourth consecutive month of falling prices. House prices fell by 3.3 per cent in the year to July 2008. According to Statistics Norway’s house price index, house prices rose by 0.6 per cent between the second quarter of 2007 and the second quarter of 2008.
Inflation is rising. Underlying inflation was higher than expected in July and now appears to be close to 3½ per cent. The inflation rate for domestically produced goods and services in particular is picking up. Inflation is likely to remain high over the coming year. Prices for oil and other key commodities have fallen recently, but levels remain high. Capacity utilisation in the Norwegian economy is high. Public spending is growing at a fast pace, manufacturing production has increased and the labour market is tight. At the same time, the krone is somewhat weaker than expected.
On the other hand, growth in the world economy is slowing markedly. New figures that have become available through summer indicate in particular a rapid slowdown in Europe. The US economy is growing at a slightly faster pace than expected in the first six months of the year, but there are signs of slower growth ahead. At the same time, inflation expectations are somewhat lower ahead. Combined with lower growth prospects, this has led to a downward adjustment of market expectations concerning central bank interest rates.
As expected, there are also signs of slower growth in the Norwegian economy. Household spending on goods has been fairly stable since autumn 2007. Building starts are declining and residential and non-residential property prices are falling. Equity prices have fallen internationally and in Norway.
The analysis in Monetary Policy Report 2/08 indicated that the key policy rate will remain at the current level, or perhaps somewhat higher, in the coming year. The Executive Board’s strategy is that the key policy rate should be in the interval 5¼ – 6¼ per cent in the period to the publication of the next Report on 29 October, unless the Norwegian economy is exposed to major shocks. New information since the previous monetary policy meeting does not provide a basis for departing from this strategy.
The key policy rate will be kept unchanged at 5.75 per cent.
1) Special drawing rights, IMF. Currently, XDRs comprise 40 per cent USD, 39 per cent EUR, 10 per cent GBP and 11 per cent JPY. As of 12 August XDR 1 = NOK 8.5.
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