The Executive Board’s monetary policy decision – background and general assessment
Meeting 25 June 2008
The Executive Board placed emphasis on the following new information that has emerged since the previous monetary policy meeting on 28 May:
- Inflation has risen in many countries, and market expectations concerning inflation seem to have increased in the US and Europe. Economic growth in the US is close to zero, and growth seems to be moderating in the euro area, the UK, Sweden and Japan. At the same time, growth remains high in China, India and other emerging market economies.
- Market participants now expect key rates in the US, the euro area, the UK and Sweden to be raised in the course of the year. A number of large emerging market economies have tightened their monetary policy stance in order to counteract increased inflation and higher inflation expectations.
- Bond yields and the cost of credit default insurance have edged up again in recent weeks. Equity prices have fallen. Premiums in international money market rates are still high, and for the longest maturities the premiums are close to the highest levels observed in the past year. In the Norwegian money market, premiums have declined on short-term loans, but have risen for more long-term loans. Since last summer, bank lending rates have increased in pace with money market rates, but bank lending margins are low.
- The price of oil has continued to rise. The Brent Blend spot price is USD 135 per barrel.
- The Economist commodity-price index has risen by 6 per cent measured in XDRs (1). By the same measure, food prices have increased by 10 per cent, industrial metals prices have fallen by 3 per cent and the price of aluminium has risen by 7 per cent. Dry cargo freight rates have fallen by 18 per cent in XDR terms.
- The import-weighted krone exchange rate has depreciated by about 2 per cent.
- The year-on-year rise in the consumer price index (CPI) was 3.1 per cent in May. Adjusted for tax changes and excluding temporary changes in energy prices (CPIXE), consumer prices rose by 3.0 per cent over the past twelve months. Adjusted for tax changes and excluding energy products (CPI-ATE), consumer price inflation was 2.3 per cent. Measured by a trimmed mean of the 12-month rise in the subindices in the CPI, inflation was 3.3 per cent in May, while a weighted median showed a rise of 3.0 per cent.
- According to Statistics Norway’s wage index, average growth in monthly salaries was 5.2 per cent in the year to 2008 Q1. Enterprises in Norges Bank’s regional network expect wage growth to be 5¾ per cent this year.
- In May, seasonally adjusted registered unemployment was 1.6 per cent of the labour force, unchanged from the previous month.
- Enterprises in Norges Bank’s regional network report moderating growth in most regions and industries. Growth remains buoyant in the petroleum supplier industry. On the whole, growth is now moderate. Capacity utilisation is still high. In manufacturing, building and construction and corporate services, a slower rise in prices is expected over the next twelve months. The rise in prices in retail trade and household services is expected to remain unchanged.
- Seasonally adjusted manufacturing output increased by 2.6 per cent in the period from February to April compared with the previous three months. According to the investment intentions survey for Q2, manufacturing investment this year is estimated at NOK 31.7 billion at current prices.
- According to the investment intentions survey for oil and gas extraction including pipeline transport, total investment in 2008 was estimated at NOK 132 billion. The estimate for 2009 was NOK 117 billion, NOK 34.3 billion higher than projected for 2008 at the same time last year.
- The Norwegian PMI (Purchasing Managers Index), which is published in collaboration between NIMA (Norwegian Association of Purchasing and Logistics) and Fokus Bank, fell from April to May as a result of a reduction in new orders.
- Non-financial enterprises’ gross domestic debt rose by 21.7 per cent in the year to April 2008. Growth in the money supply was 11.3 per cent in the same period.
- TNS Gallup’s trend indicator, which measures household’s assessments and expectations concerning their financial situation and the country’s economy, declined further from the first to the second quarter this year. The indicator is now lower than its average.
- Seasonally adjusted household goods consumption fell by 0.2 per cent from March to April. Goods consumption was approximately unchanged from February to March, revised up from -0.5 per cent. Goods consumption has remained approximately unchanged since last autumn.
- Twelve-month growth in gross domestic household debt was 10.9 per cent in April.
- According to building statistics, housing starts in square metres fell by 34.3 per cent in April this year compared with the same period last year. Other property starts rose by 16.9 per cent, with commercial property starts increasing by 21 per cent in the same period.
- According to house price statistics from the real estate industry, seasonally adjusted house prices remained unchanged from April to May. Prices in May were 1.3 per cent lower than in May last year.
Inflation has been slightly higher than expected and there are prospects of a further rise. On the whole, underlying inflation is close to, but somewhat higher than 2.5 per cent. Capacity utilisation is still high. Unemployment is at a historically low level, and wages are rising rapidly. The upturn in Norway is entering a new phase. A period of low inflation and high growth is being followed by somewhat higher inflation and lower growth. Global growth prospects have weakened. Interest rate expectations abroad have nevertheless shown a marked upward shift. Inflation has risen in many countries. At the same time, money market rates are still considerably higher than central bank key rate expectations would normally imply.
The analysis in Monetary Policy Report 2/08 indicates 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 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 growth or a weaker krone may lead to higher-than-projected inflation. The effect of the agricultural settlement and higher global energy and food prices on inflation in Norway is also uncertain. On the other hand, if the effects of the global slowdown on the Norwegian economy are stronger than expected or if the krone appreciates markedly, inflation may be lower than projected.
Weaker global and domestic growth prospects may in isolation suggest that the interest rate should be kept unchanged. The increase in inflation, prospects of rising inflation and the consideration of anchoring inflation expectations close to the inflation target nevertheless indicate that the key policy rate should now be raised.
The key policy rate will be raised by 0.25 percentage point to 5.75 per cent with effect from 26 June 2008.
1) Special drawing rights, IMF. Currently, XDRs comprise 39 % USD, 39 % EUR, 11 % GBP and 11 % JPY. As of 23 June, XDR 1 = NOK 8.3.
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