The Executive Board's monetary policy decision – background and general assessment
Meeting 23 September 2009
The Executive Board places emphasis on the following new information that has emerged since the previous monetary policy meeting on 12 August:
- Growth in the global economy has been somewhat stronger than projected in Monetary Policy Report 2/09. The OECD has revised up its June projections for economic growth across the G7 countries . The OECD now expects activity to fall by 3.7 per cent in 2009, compared with the 4.1% decline projected in June. Manufacturing production has recently increased in the US, the UK, Japan and many emerging market economies, but is still decreasing in Sweden and the euro area. At the same time, manufacturing confidence indicators point to growth in most advanced economies ahead. Economic activity in the US and many advanced economies is nonetheless still very low, and unemployment continues to rise.
- Inflation, as measured by the year-on-year change in consumer prices, seems to have bottomed out in some countries. Price levels are nevertheless lower than a year ago in the US, the euro area, Sweden, Japan and China. Core inflation is positive, except in Japan and China, and is in the interval 1¼ - 1¾ per cent in many countries.
- Global money market rates have shown a further decline and risk premiums are still moving down. Short-term money market premiums are now close to the level prevailing before the onset of the financial crisis in autumn 2008, while for longer maturities they remain relatively high.
- Norwegian money market rates have edged up. Over the past five trading days, the three-month NIBOR averaged 1.9 per cent. International money market rates have fallen in the same period and the interest rate differential between Norway and trading partners has widened markedly. The three-month interest rate differential is now 1.3 percentage points. Money market risk premiums have fallen somewhat further than assumed in the June Monetary Policy Report.
- The import-weighted krone exchange rate (I-44) has appreciated by 1.5 per cent since the previous monetary policy meeting in August. So far in 2009 Q3, the exchange rate has been 94.4, approximately as assumed in Monetary Policy Report 2/09. Measured by relative consumer prices in a common currency, the real krone exchange rate is approximately in line with the average for the past 40 years. Measured in relative wages in a common currency, the real exchange rate is a good 10 per cent higher than the average for the past 40 years.
- Equity prices have risen both in Norway and abroad. The Oslo Stock Exchange benchmark index has advanced by around 7 per cent since the previous monetary policy meeting.
- Borrowing in the bond market has increased markedly both in the US and the euro area.
- The average spot price of Brent Blend oil has been USD 70 per barrel over the past five trading days, or about 5 per cent higher than at the time of the previous monetary policy meeting in August. Futures prices for delivery in 2010 have been USD 75 per barrel over the past five trading days. OECD oil inventories were 4 per cent higher at the end of July than one year earlier. OPEC spare production capacity has more than doubled over the past year.
- The Economist commodity-price index has fallen by 2 per cent since the previous monetary policy meeting, measured in XDR . Food prices have fallen by 7 per cent. Industrial metals prices have increased by 5 per cent. In the same period, dry cargo freight rates fell by 16 per cent.
- The year-on-year rise in the consumer price index (CPI) was 1.9 per cent in August. Adjusted for tax changes and excluding temporary changes in energy prices (CPIXE), consumer prices rose by 2.3 per cent. Adjusted for tax changes and excluding energy products (CPI-ATE), the year-on-year rise was also 2.3 per cent. Measured by a trimmed mean of the 12-month rise in the sub-indices in the CPI, inflation was 2.2 per cent in August, while a weighted median showed a rise of 3.1 per cent. Overall inflation since the previous Monetary Policy Report has been approximately in line with that expected.
- According to Perduco’s expectations survey for 2009 Q3, inflation expectations among the social partners and economists one year and five years ahead showed little change. Inflation expectations two years ahead have edged up compared with the Q2 survey and are now slightly above 2.5 per cent.
- According to house price statistics from the real estate industry, seasonally adjusted house prices rose by 0.7 per cent in August, after increasing by 1.3 per cent the previous month. House prices have risen by 4.6 per cent since August 2008 and by 10.1 per cent since the trough in November 2008. House prices have fallen by a seasonally adjusted 1.1 per cent since the peak in June 2007.
- According to OPAK’s property report for the first half of 2009, rental and market prices for office premises in Oslo continued to fall. Rental prices for centrally located high-standard premises in Oslo have declined by 4 per cent since December 2008 and 6 per cent since the peak in 2007. Market prices for this category of premises have fallen by 5 per cent since December 2008 and 23 per cent since prices peaked in 2007.
- Preliminary figures from the quarterly national accounts show that seasonally adjusted household consumption rose by 0.6 per cent from 2009 Q1 to Q2. Spending on goods showed the strongest rise. The index for household spending on goods rose by a seasonally adjusted 2.1 per cent from June to July after decreasing by 2.0 per cent the previous month. Goods consumption has picked up again after falling through autumn 2008 and is now somewhat higher than at the same time last year. Second-hand car imports and new car registrations showed a decline of 2.6 per cent in the 12 months to August 2009.
- TNS Gallup’s trend indicator measures households’ assessments and expectations concerning their own financial situation and the Norwegian economy. When the index is below zero, a majority of households has a negative view of the outlook. The trend indicator increased from 0.5 point to 11.7 points from Q2 to Q3.
- According to preliminary figures from household income accounts, household nominal disposable income excluding dividend income was 6.9 per cent higher over the four quarters to 2009 Q2 compared with the same period one year earlier. In the first quarter of this year, the corresponding figure was 8.1 per cent. The household saving ratio excluding dividend income was 3.2 per cent in the four-quarter period to Q2, up from 2.1 per cent in Q1. The average saving ratio excluding dividend income has been 0.5 per cent over the past ten years.
- Gross domestic debt (C2) increased by 6.4 per cent in the 12 months to July this year. The corresponding figure for June was 6.7 per cent. Growth in credit to non-financial enterprises is still decelerating, but household credit growth has been stable in recent months. Non-financial enterprises’ holdings of liquid assets (M2) increased by 2.5 per cent in the 12 months to July this year.
- According to the third-quarter investment intentions survey for oil and gas production including pipeline transport, the total investment value is estimated at NOK 144 billion in 2009, i.e. value growth of 11 per cent compared with the estimate for 2008 published at the same time last year. The investment estimate for 2010 is 9.0 per cent higher than the estimate for 2009 published at the same time last year.
- According to the third-quarter investment intentions survey for manufacturing, the total investment value for 2009 is estimated at NOK 24 billion, i.e. a decline of 26 per cent compared with the estimate for 2008 published one year earlier. For most manufacturing sectors, the estimates are considerably lower than in last year’s survey. Investment in energy production is estimated at around NOK 17 billion in 2010, i.e. an increase of 42 per cent compared with the 2009 survey.
- Manufacturing production was a seasonally adjusted 2.5 per cent lower in the period May to July this year than in the three previous months. Manufacturing production rose by 0.5 per cent from June to July.
- According to order statistics for manufacturing, the value of new orders fell by 39 per cent from 2008 Q2 to 2009 Q2. The value of order stocks fell 30 per cent in the same period. Both new orders and order stocks fell markedly on the previous quarter. Over the past year, inflowing export orders have declined at a faster pace than inflowing domestic orders.
- The Norwegian PMI (Purchasing Managers Index) estimates activity changes in Norwegian manufacturing based on monthly surveys of manufacturing purchasing managers. Seasonally adjusted, the PMI was 42.3 in August, down from 50.1 in July. Levels below 50 denote a fall in activity. All PMI sub-indices were below 50 in August.
- According to building statistics, the number of housing starts fell by 31 per cent in the 12 months to July 2009. Measured by utility floor space, the decline came to 23 per cent. Other building starts fell by 58 per cent. The average monthly registration delay for building starts was about 3 months in July. According to order statistics for the building and construction industry, the value of new orders increased by 5 per cent from 2009 Q1 to Q2. The value of total order reserves remained unchanged in the same period. The stock of building orders fell by 3 per cent, while the stock of construction orders increased by 5 per cent.
- Preliminary seasonally adjusted figures from the quarterly national accounts show that mainland GDP grew by 0.3 per cent from 2009 Q1 to Q2, measured at market value. Second-quarter growth was somewhat higher then estimated in Monetary Policy Report 2/09. Productivity (basis value) was 0.6 per cent lower than one year earlier.
- Seasonally adjusted registered unemployment was 2.9 per cent in August, or unchanged on July. According to Statistics Norway’s labour force survey (LFS), seasonally adjusted unemployment was 3 per cent in June, or about unchanged on the previous month. Employment was unchanged, while the labour force contracted by 4 000 from May to June. So far in third quarter, registered unemployment has been lower than projected in Monetary Policy Report 2/09.
Activity in the global economy is picking up. Conditions in international financial markets have improved. In Europe and the US, capacity utilisation is nevertheless very low and unemployment is high. There is still a risk of continued low growth for a fairly long period ahead. Key rates are close to zero in many countries and global money market rates have fallen.
Monetary policy in Norway is oriented towards annual consumer price inflation of close to 2.5 per cent over time. Underlying inflation is now below the target. The krone has appreciated and will, in conjunction with continued low imported inflation, contribute to keeping inflation below target in the year ahead. This suggests that the key policy rate should be kept low for a period ahead.
Growth in the Norwegian economy has picked up at a more rapid pace than was expected a few months ago. High activity in the oil industry and monetary and fiscal policy measures have contributed to supporting demand for goods and services. Employment is stable and it appears that unemployment will be considerably lower than expected, despite the decline in manufacturing and the building and construction industry. Low interest rates are contributing to renewed growth in household consumption. Higher capacity utilisation and low productivity growth may increase upward pressure on costs, pointing towards somewhat higher inflation and suggesting that the key policy rate should be raised earlier than projected in the June Monetary Policy Report.
The arrangement whereby banks can exchange covered bonds (OMF) for government securities has made a substantial contribution to securing long-term funding for banks. Banks and companies are now again able to obtain funding in the bond market. The minimum price in the swap arrangement has been adjusted to market rates and the arrangement will be phased out in the course of the autumn. Surplus liquidity in the banking system is decreasing, indicating that banks no longer see the need for the same level of reserve liquidity as previously.
Norges Bank’s Executive Board decided in June that the key policy rate should be in the interval ¾ - 1¾ per cent in the period to the publication of the next Monetary Policy Report on 28 October 2009 unless the Norwegian economy is exposed to new major shocks. On balance, it now seems appropriate to keep the key policy rate unchanged. The Executive Board considered the alternative of increasing the key policy rate at today’s meeting.
The key policy rate is kept unchanged at 1.25 per cent.
1) Canada, France, Italy, Japan, the UK, Germany and the US.
2) The interest rate differential against Japan, the US, the UK and Sweden.
3) Special drawing rights, IMF. On 22 September: 1 XDR = NOK 9.3
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