Meeting 13 March 2008

Economic developments

The Executive Board placed emphasis on the following new information that has emerged since the previous monetary policy meeting on 23 January:

• Growth in the US economy seems to be at a standstill, and there are fears of a setback. The labour market has weakened and the housing market is still slumping. The Federal Reserve has cut its key rate substantially. Growth is also slowing in a number of western European countries, and the Bank of England has also reduced its key rate. At the same time, inflation has picked up in many countries, and the central banks in Sweden and Australia have raised their key rates. The outlook for emerging economies such as China and India still seems to be solid, although growth has softened somewhat.
• The central banks in the US, Canada, the UK and Switzerland and the European Central Bank have continued and expanded their liquidity provision operations since December in order to increase liquidity in money markets. In addition, the Federal Reserve has announced a debt financing initiative where  primary dealers may  borrow US government securities against other less liquid securities.
• Risk premiums in international money and credit markets have again increased. Money market rates are in some cases considerably higher than central bank key rates. Market participants expect that our trading partners will on average reduce key rates further over the coming months. Equity prices rose through February, but have fallen back in the last few weeks and are volatile.
• Total petroleum production on the Norwegian continental shelf fell by 4.4 per cent from 2006 to 2007. The spot price of Brent Blend oil is USD 109 per barrel. Average selling prices for gas from StatoilHydro rose from the third to the fourth quarter in 2007.  
• The Economist commodity-price index has increased by 15 per cent in SDR terms. By the same measure, food prices have risen by 14 per cent. Prices for fresh salmon have edged up by 2 per cent, while prices for frozen salmon have increased by 11 per cent. Prices for industrial metals have risen by 20 per cent in SDR terms, and aluminium prices have increased by 27 per cent. After falling earlier in 2008, dry cargo freight rates have moved up by 33 per cent measured in SDR terms
• The import-weighted exchange rate has appreciated by about 3.1 per cent.
• The year-on-year rise in the consumer price index (CPI) was 3.7 per cent in February. Different measures of underlying inflation range between 2¼ and 3¼ per cent. The CPI adjusted for tax changes and excluding energy products (CPI-ATE) showed a year-on-year rise of 2.2 per cent. Inflation measured by a trimmed mean of the twelve-month rise in the sub-indices of the CPI was 3.1 per cent in February, while a weighted median showed an increase of 2.3 per cent.
• TNS Gallup’s first-quarter expectations survey showed that inflation expectations have risen both at the one- and the two-year horizon, while expectations are more stable at the five-year horizon. Among Norges Bank’s contacts in its regional network, enterprises in retail trade expect selling prices to increase at a faster pace, while other enterprises expect a slower rise in their selling prices.
• Preliminary figures from the quarterly national accounts showed that mainland GDP grew by 6.0 per cent from 2006 to 2007. Adjusted for seasonal fluctuations, mainland GDP rose by 0.9 per cent from the third to fourth quarter, at market prices. Excluding electricity production, growth was 1.3 per cent in the same period. On the production side (at basic prices), GDP growth was 1.7 per cent excluding electricity production.
• Enterprises in Norges Bank’s regional network report continued solid growth in turnover, but growth is slowing in all industries with the exception of household services. Contacts report that capacity utilisation is somewhat lower, but still at a high level. Enterprises are planning a more modest expansion of their workforces ahead.
• In February, registered seasonally adjusted unemployment stood at 1.7 per cent, the same as in the previous three months. According to Statistics Norway’s Labour Force Survey (LFS), seasonally adjusted unemployment came to 2.4 per cent in December (three-month period November– January), down from 2.5 per cent the previous month. Employment rose by 5 000 and the labour force expanded by 3 000 from November to December.
• In the preliminary report from the Technical Reporting Committee on Income Settlements annual wage growth in 2007 for all wage-earners was estimated at 5.4 per cent. The total wage carry-over into 2008 is estimated at 2 per cent. Contacts in Norges Bank’s regional network expect wage growth to be 5½ per cent in 2008.
• Manufacturing output fell by a seasonally adjusted 1.0 per cent in the period November to January compared with the previous three months.
• Twelve-month growth in non-financial enterprises’ gross domestic debt was 21.1 per cent in January. The corresponding increase in the money supply was 15.5 per cent in January.
• According to building statistics, commercial property starts were 40 per cent higher, measured in square metres, in the fourth quarter of 2007 than in the same quarter of 2006. Housing starts, measured in square metres, were 16 per cent lower in the fourth quarter of 2007 than in the same quarter of 2006.
• House price statistics from the real estate industry showed a seasonally adjusted rise in house prices of 0.4 per cent from January to February. The twelve-month rate of increase was 0.1 per cent, the same as in January.
• Preliminary figures from institutional sector accounts showed that the household saving ratio excluding share dividends was -2.8 per cent in 2007. Household nominal disposable income increased by 6.2 per cent from 2006 to 2007.
• Preliminary figures from financial accounts for households and non-profit organisations showed that household net lending was a negative NOK 74 billion in 2007. As a result of net gains in securities and exchange markets, the total decline in household net financial wealth was NOK 37 billion. The twelve-month rise in household gross domestic debt was 11.2 per cent in January.
• TNS Gallup’s trend indicator for the first quarter shows that Norwegian households expect somewhat weaker economic developments in Norway, but they remain optimistic with regard to the outlook for their own financial situation. Household spending on goods, adjusted for seasonal variations, fell by 1.7 per cent from December to January, after declining by 0.6 per cent the previous month.

Assessment

Inflation has picked up markedly over the past few months. Various measures of inflation show somewhat different developments, but on the whole underlying inflation is close to 2.5 per cent. Inflation is expected to move up one to two years ahead. Growth in the Norwegian economy has remained firm and was unexpectedly high towards the end of 2007. Capacity utilisation is high, and the labour market is tight. Employment growth has remained high, and wage growth is picking up.

On the other hand, the outlook for the global economy has weakened. Interest rates have shifted down in the US and a number of other countries. The krone has appreciated. Enterprises in Norges Bank’s regional network are still expecting an increase in activity ahead, but to a lesser extent than previously. There are also signs that growth in household consumption is softening.

The objective of monetary policy is low and stable inflation with annual consumer price inflation of close to 2.5 per cent over time. The analyses in Monetary Policy Report 1/08 suggest that the key policy rate may be raised further in the period to summer. The prospect of higher price and cost inflation will in the short term outweigh weaker growth in the world economy.

The projections are uncertain. New information may reveal aspects of economic developments that indicate that the Norwegian economy is moving on a different path than projected. On the one hand, unexpectedly high cost inflation, higher import prices or a weaker krone may result in higher-than-projected inflation. On the other hand, if the global downturn has a stronger-than-expected impact on the Norwegian economy or if the krone appreciates markedly, inflation may be lower than projected.

The Executive Board’s strategy is that the key policy rate should be in the interval 5 – 6 per cent in the period to the publication of the next Report on 25 June, unless the Norwegian economy is exposed to major shocks.

An alternative is to increase the interest rate, but an overall assessment indicates that it is appropriate to keep the interest rate unchanged now.

Decision

The key policy rate will be kept unchanged at 5.25 per cent.