The Executive Board’s monetary policy decision - background and general assessment
Meeting 23 January 2008
The Executive Board placed emphasis on the following new information that has emerged since the previous monetary policy meeting on 12 December:
- Growth is slowing in the US and a number of Western European countries. Developments in the US housing market have been particularly weak. The growth outlook for emerging economies like China and India appears to remain favourable, but growth has softened somewhat.
- The US Federal Reserve has reduced its key rate by 0.75 percentage point and the Bank of Canada has cut its key rate by 0.25 percentage point. Money markets have priced in further policy rate cuts ahead, also in the euro area and the UK.
- Equity prices have declined sharply internationally and in Norway. Financials have headed the decline, partly reflecting substantial losses by international banks and insurance companies. The costs of credit default insurance have increased.
- Risk premiums in money markets have declined. Money market rates in many countries, including Norway, are still higher than market policy-rate expectations would imply. Market participants expect premiums to fall gradually and return to normal in the course of the year. Banks’ mortgage lending rates for loans secured within 60 per cent of the dwelling’s purchase price has increased by about 0.4 percentage point.
- The spot price of Brent Blend oil is USD 89 per barrel. Total petroleum production on the Norwegian continental shelf dropped by 4.4 per cent in the period January to November 2007, compared with the same period one year earlier.
- The Economist commodity-price index has increased by 9 per cent, in SDR terms. By the same measure, food prices have increased by 12 per cent, while industrial metals have risen by 6 per cent. Dry cargo freight rates have fallen by 35 per cent from a high level.
- The import-weighted krone exchange rate has depreciated by about 1 per cent.
- The year-on-year rise in the consumer price index (CPI) was 2.8 per cent in December. Adjusted for tax changes and excluding energy products, the year-on-year rise in consumer prices (CPI-ATE) was 1.8 per cent. The rise in prices measured by a trimmed mean of the twelve-month rise in the sub-indices in the CPI was 2.6 per cent in December, while a weighted median showed a rise of 2.2 per cent.
- According to external trade statistics, prices for traditional goods exports rose by 0.8 per cent between the fourth quarter of 2006 and the fourth quarter of 2007. Import prices for goods, excluding ships and platforms, fell by 1.9 per cent in the same period.
- According to Statistics Norway’s wage statistics, annual wage growth for wholesale and retail trade was estimated at 5.9 per cent in 2007, partly reflecting the strong increase in earnings for employees in “motor vehicle services”. Wage growth was 5.0 per cent for retail trade in 2007.
- In December, registered unemployment adjusted for seasonal patterns was 1.7 per cent, unchanged on the previous month. According to Statistics Norway’s labour force survey (LFS), unemployment fell to a seasonally adjusted 2.5 per cent in October (three-month period September-November). Employment increased by 14 000 and the labour force expanded by 11 000 between September and October.
- Manufacturing production increased by a seasonally adjusted 1.2 per cent in the period September to November, compared with the previous three-month period. Intermediate goods made the strongest contribution to growth, with an increase of 2.2 per cent.
- Twelve-month growth in non-financial enterprises’ gross domestic debt was 21.3 per cent in November. The corresponding increase in the money supply was 22.3 per cent. Building statistics show a 4 per cent trend increase in commercial property starts between September and November, compared with the previous three-month period.
- Household net lending came to a negative NOK 73.5 billion in the year to the end of the third quarter of 2007. Household net assets still showed an increase as a result of valuation changes. Twelve-month growth in household gross domestic debt was 11.5 per cent in November.
- Household spending on goods rose by a seasonally adjusted 0.9 per cent between October and November, after falling by 0.4 per cent in the previous month. Spending on clothing and footwear, furniture and white goods made the strongest contribution to growth in November. The volume of retail sales, excluding motor vehicles and petrol, increased by a seasonally adjusted 1.0 per cent in the same period, after falling by 0.3 per cent between September and October.
- House price statistics from the real estate industry showed a continued seasonally adjusted fall in house prices in December. The twelve-month rate of increase moved down to 1.9 per cent. According to building statistics, housing starts remained at the same trend level in autumn as that recorded in summer.
Consumer price inflation has edged up. Different indicators of underlying inflation ranged between 1¾ and 2½ per cent in December. Total consumer prices (CPI) rose at a faster rate, partly reflecting higher electricity prices. The rate of increase in consumer prices has been higher than expected. Many businesses normally change their selling prices at the beginning of the year. Price developments in January and February will therefore be important in assessing underlying inflation.
Employment exhibited a marked increase in autumn and the labour force continued to expand. Growth in household consumption has been faster than projected. On the other hand, weaker growth among our trading partners will normally have an adverse impact on the Norwegian economy. Developments in the US have been weaker than expected and the US central bank has reduced its key rate markedly. There has been a considerable downward shift in global interest rate expectations in recent weeks. The growth outlook for the world economy has weakened and equity prices have declined. House prices have fallen in several countries, including Norway. Short-term money market rates have edged down from the high levels prevailing in autumn, but are still higher than implied by policy-rate expectations. In Norway, bank lending rates have increased more than the key policy rate.
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 in March, unless the Norwegian economy is exposed to major shocks. The krone exchange rate has varied somewhat recently and is now weaker than projected in Monetary Policy Report 3/07. Inflation picked up faster than expected in December and growth in the Norwegian economy is strong, but in view of the weak developments in the external environment and the turbulence in financial markets, it is now on balance appropriate to leave the key policy rate unchanged.
The key policy rate will be kept unchanged at 5.25 per cent.
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