The Executive Board’s monetary policy decision – background and general assessment
Meeting 23 April 2008
The Executive Board placed emphasis on the following new information that has emerged since the previous monetary policy meeting on 13 March:
- There are fears of a downturn in the US and economic growth is also slowing in a number of European countries. Many market participants and the IMF have revised down their economic growth forecasts, particularly for the US economy. At the same time, growth remains firm in emerging market economies such as China and India, and inflation is on the rise in many countries.
- Key rates have been reduced in the US and UK. There are still prospects that key rates among trading partners will be lowered in the months ahead, but not to the same extent as earlier.
- The global financial turbulence reached new heights in mid-March when the US investment bank Bear Stearns was unable to renew its short-term financing. The Federal Reserve provided extraordinary funding in the wake of the near-failure of the bank. Early this week, the Bank of England introduced extensive measures to facilitate the provision of liquidity.
- Money market rates are substantially higher than expected key rates. Several central banks have maintained extraordinary liquidity-providing facilities. In Norway, the three-month money market rate is a good 1 percentage point higher than Norges Bank’s key policy rate. The difference partly reflects expectations of higher key rates, but it is nevertheless abnormally wide. Norwegian banks’ average residential mortgage lending rate for new loans up to NOK 1 million is above 6½ per cent.
- Oil prices remain very high. The Brent Blend spot price is USD 113 p/b.
- Commodity prices are also very elevated in spite of a decline since the previous monetary policy meeting. The Economist commodity-price index has fallen by 5 per cent in SDR terms. In SDR terms, food prices have fallen by 4 per cent, fresh salmon prices have increased by 2 per cent and frozen salmon prices have increased by 1 per cent. Prices for industrial metals have declined by 6 per cent in SDR terms, and aluminium prices have fallen by 2 per cent. Freight rates for dry cargo have increased by 5 per cent in SDR terms.
- The import-weighted krone exchange rate is approximately unchanged.
- The year-on-year rise in the consumer price index (CPI) was 3.2 per cent in March. Adjusted for tax changes and excluding energy products (CPI-ATE), the year-on-year rise in consumer prices was 2.1 per cent. Inflation measured by a trimmed mean of the twelve-month rise in the sub-indices of the CPI was 3.3 per cent in March, while a weighted median showed an increase of 3.0 per cent.
- The Confederation of Norwegian Enterprises and the Norwegian Confederation of Trade Unions/Confederation of Vocational Unions have concluded wage agreements providing for a general hourly pay increase of NOK 2 and a further hourly increment of NOK 3 for pay agreements that are below 90 per cent of the average pay of manufacturing workers. The social partners estimate annual wage growth in the settlement at 5.6 per cent. The Government and the social partners have reached agreement on a new early retirement scheme. The Federation of Norwegian Commercial and Service Enterprises and the Norwegian Confederation of Trade Unions/Confederation of Vocational Unions have agreed on a general hourly pay increase of NOK 2 in addition to a pay increase for low-income earners. The social partners’ estimate for annual wage growth is the same as in the settlement between the Confederation of Norwegian Enterprises and the Norwegian Confederation of Trade Unions/Confederation of Vocational Unions.
- In March, seasonally adjusted registered unemployment was 1.7 per cent, the same as in the previous four months. According to Statistics Norway’s labour force survey (LFS), seasonally adjusted unemployment stood at 2.3 per cent in January (three-month period December-February), down from 2.4 per cent the previous month. Employment increased by 6 000 persons and the labour force expanded by 5 000 from December to January.
- Population growth appears to remain high. According to estimates from Statistics Norway, the population has increased by about 19 000 so far this year.
- Seasonally adjusted manufacturing production declined by 0.4 per cent in the period December to January compared with the previous three-month period.
- The enterprises in Norges Bank’s regional network report weaker growth in turnover in all industries, particularly in the construction industry. So far this year, growth seems to have slowed to a more normal level. A majority of enterprises expect prices to rise at a slower pace in the year ahead, particularly in the construction industry. The rise in prices is expected to remain unchanged in the retail industry and among enterprises providing services to households.
- Twelve-month growth in non-financial enterprises’ gross domestic debt was 20.7 per cent in February. The corresponding increase in the money supply was 13.0 per cent in February.
- According to seasonally adjusted building statistics, housing starts in square metres fell by 15.3 per cent in the period December – February compared with previous three months. Other property starts showed a fall of 6.4 per cent in the same period.
- House price statistics from the real estate industry showed a seasonally adjusted rise in house prices of 0.5 per cent from February to March. The twelve-month rate of increase was -0.1 per cent, up from -0.3 per cent in February.
- Household spending on goods increased by a seasonally adjusted 2.0 per cent from January to February, after falling by 1.8 per cent in the previous month. The twelve-month rise in household gross domestic debt was 11.4 per cent in February.
- ForbrukerMeteret (Consumer Confidence Index), which is a monthly survey of household confidence and expectations concerning their financial situation and the Norwegian economy, fell in March.
Inflation has picked up markedly since last autumn. The rise in prices for domestically produced goods and services has been particularly sharp. Various measures of inflation are slightly divergent, but on the whole underlying inflation is close to 2.5 per cent. Capacity utilisation is high, and the labour market remains tight. The first wage settlements indicate as expected that wage growth is picking up. House prices have risen again after declining for several months. Oil prices remain high. The krone depreciated in March, but appreciated again in April. The prospect of higher inflation implies an increase in the key policy rate.
On the other hand, the US economy is weak. The US housing crisis has resulted in substantial losses in financial institutions also in other countries. Financial markets are still turbulent and global economic growth may turn out to be weaker than previously assumed. Key rates are still expected to be lowered in many countries, but higher inflation expectations have pushed up long-term interest rates. Risk premiums in international money and credit markets have remained high, and borrowing costs have risen for businesses and financial institutions. In Norway, bank lending rates have recently increased somewhat. This may reflect expectations of a rise in the key rate in Norway, but also expectations of continued tightness in money and credit markets.
The strategy in Monetary Policy Report 1/08 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. New information since the previous monetary policy meeting does not on balance warrant a deviation from this strategy. The prospect of higher price and cost inflation outweighs the impact of weaker global growth in the short term. Higher interest rates will contribute to a gradual decline in capacity utilisation, so that inflation does not become too high.
The key policy rate will be raised by 0.25 percentage point to 5.50 per cent with effect from 24 April 2008.
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