The Executive Board’s monetary policy decision – background and general assessment
Meeting 28 May 2008
The Executive Board placed emphasis on the following new information that has emerged since the previous monetary policy meeting on 23 April:
- Inflation has moved up in many countries. In the euro area, the UK and Sweden inflation has been higher than the inflation target. Inflation is also on the rise in Japan. Economic growth in the US has slowed. Even though growth was solid in Western Europe in the first quarter, there are lower growth prospects for the region. Growth remains strong in emerging market economies.
- The federal funds rate has been lowered in the US. Earlier this year, market participants expected lower or unchanged interest rates in many countries, but central bank key rates are now expected to increase in the US, the euro area, the UK and Sweden in the course of the year.
- Premiums in international money markets have edged down recently, but are still high. Several central banks have maintained and broadened schemes for supplying liquidity to money markets.
- Norges Bank has supplied liquidity through currency swaps, with an attendant decline in premiums on short-term money market rates to a level on a par with international premiums. Premiums on longer-term money market instruments have continued to increase. Three-month money market rates are about 1 percentage point higher than Norges Bank’s key policy rate. The difference partly reflects expectations of higher key rates, but is still abnormally wide. Norwegian banks’ interest rate on new mortgage loans up to NOK 1 million is about 6¾ per cent. According to Norges Bank’s survey of bank lending, banks continued to tighten credit standards for non-financial enterprises in the first quarter of this year.
- Equity prices on the Oslo Stock Exchange have shown strong gains. Equity prices abroad have fluctuated somewhat, but remain approximately unchanged since end-April. The cost of credit default insurance fell after the previous monetary policy meeting, but has increased in recent days.
- Oil prices have continued to rise. The spot price of Brent Blend oil is USD 127 per barrel. StatoilHydro’s gas selling prices in krone terms increased by 12.6 per cent between the first quarter of 2007 and the first quarter of this year. According to the Norwegian Petroleum Directorate, Norwegian petroleum production was 3.4 per cent higher in the first quarter than in the same period last year.
- Commodity prices have remained high despite a recent decline. The Economist commodity-price index has fallen by 2 per cent in SDR terms. By the same measure, food prices have dropped by 2 per cent, industrial metal prices by 4 per cent and aluminium prices by 2 per cent. Dry cargo freight rates have increased by 28 per cent in SDR terms.
- The import-weighted krone exchange rate remains approximately unchanged.
- The year-on-year rise in the consumer prices index (CPI) was 3.1 per cent in April. Adjusted for tax changes and excluding energy products, consumer prices (CPI-ATE) rose by 2.4 per cent over the past twelve months, or 0.2 percentage point faster than projected in Monetary Policy Report 1/08. Energy prices have increased sharply in recent years. The increase in oil prices this year may amplify this tendency. Adjusted for tax changes and temporary changes in energy prices, consumer price inflation was about 2¾ in April.
- Measured by a trimmed mean of the twelve-month rise in the sub-indices in the CPI, CPI inflation was 3.4 per cent in April, while a weighted median showed a rate of increase of 3.1 per cent.
- Negotiations between the Norwegian government and the agricultural sector resulted in a new agriculture agreement which has been sent to ballot. The agreement provides for an income framework of NOK 1.9 billion, of which NOK 1.5 billion through price increases. In isolation, this results in an increase in food prices in the CPI of 2¼ per cent.
- The wage settlement for the central government sector resulted in a negotiated pay increase of 4.2 per cent. The wage settlement for the local government sector, excluding the education sector, resulted in a negotiated pay increase of 4.7 per cent. The carry over into 2008 was estimated at 1.4 per cent for employees in both the local and the central government sectors. Wage drift comes in addition.
- Prices for traditional export goods rose by 0.8 per cent between the first quarter of 2007 and the first quarter of 2008 according to external trade statistics. Import prices for goods excluding ships and platforms fell by 0.3 per cent in the same period.
- According to the Revised National Budget for 2008, nominal underlying spending growth over the central government budget is estimated at 8.3 per cent between 2007 and 2008, after rising by 6.9 per cent in the previous year. Spending growth is revised up from the central government budget for 2008. The non-oil budget deficit is estimated at 0.7 per cent as a percentage of mainland GDP. The structural deficit is estimated to increase by NOK 16 billion to NOK 73.9 billion, which comes to 3.7 per cent of the capital in Government Pension Fund – Global. Growth in local government nominal revenues is estimated at 5.5 per cent for 2007 and at 6.2 per cent in 2008.
- Mainland GDP excluding indirect taxes and electricity production showed seasonally adjusted growth of 0.7 per cent between the fourth quarter of 2007 and the first quarter of 2008. Including indirect taxes, growth was 0.3 per cent. A decline in spending on high-tax goods such as electricity and cars contributed to a reduction in value added tax receipts and other special government taxes. Including electricity production and indirect taxes, mainland GDP growth was 0.2 per cent.
- Manufacturing production increased by a seasonally adjusted 1.0 per cent in the period January-March on the previous three-month period. Non-financial enterprises’ gross domestic debt increased by 20.9 per cent in the year to March 2008. The corresponding increase in the money supply was 7.5 per cent in the same period.
- According to order statistics for manufacturing, the value of new orders sank by 18.1 per cent between the first quarter of 2007 and the first quarter of this year. The value of order reserves increased by 20 per cent in the same period.
- In April, seasonally adjusted registered unemployment stood at 1.6 per cent, or 0.1 percentage point lower than in the previous five months. According to Statistics Norway’s labour force survey (LFS), seasonally adjusted unemployment was 2.4 per cent in March (three-month period February to April), or the same as in the previous three months. The number of employed increased by 5 000, and the labour force expanded by 4 000 between February and March.
- Household spending on goods fell by a seasonally adjusted 0.5 per cent between February and March. Goods consumption has remained broadly unchanged since last summer.
- Twelve-month growth in household gross domestic debt was 11.0 per cent in March. Preliminary institutional sector accounts figures showed that the household saving ratio excluding dividend income was -2.3 per cent in the past four quarters.
- Building statistics show a seasonally adjusted drop in housing starts in square metres of 4.9 per cent between the first quarter of last year and the first quarter of 2008. In the same period, non-residential building starts fell by 1.9 per cent.
- According to house price statistics from the real estate industry, house prices rose by a seasonally adjusted 0.1 per cent between March and April. Prices were 0.8 per cent lower than in April 2007.
Inflation has moved up over the past six months and is higher than assumed. Oil prices have continued to rise to a very high level. Rising energy and food prices are fuelling inflation in many countries, and interest rate expectations abroad have increased. The labour market remains tight, and the wage settlements indicate as expected higher wage growth in Norway. On the whole, underlying inflation is close to, but somewhat higher than 2.5 per cent.
Capacity utilisation in the Norwegian economy is still high, but as expected there are signs that economic growth is moderating. Growth in household spending is slowing. Building starts have declined. Developments in the global economy are divergent, but there are lower growth prospects. On the other hand, profitability in the petroleum industry is solid owing to high oil prices and public spending is growing at a fast pace.
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. Monetary policy is now having a tightening impact. The krone exchange rate has fluctuated recently, but has appreciated in a somewhat longer perspective. Inflation has nevertheless increased. The increase in inflation and the prospect of higher inflation suggest a further increase in the key policy rate. Against the background of the turbulence in financial markets, high premiums in the money market and uncertainty about the global economic outlook, it is nevertheless appropriate to leave the key policy rate unchanged now.
The key policy rate will be kept unchanged at 5.50 per cent.
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