The Executive Board's monetary policy decision – background and general assessment
Meeting 28 October 2009
The Executive Board has placed emphasis on the following new information that has emerged since the previous monetary policy meeting on 23 September:
- Activity in the world economy is picking up, but from a low level. Manufacturing production is expanding rapidly in Asia and the US. In Europe, production contracted to end-August, but new orders have increased. There is still considerable spare capacity in advanced economies. The IMF has revised up its growth forecasts for the world economy and now projects a fall in global GDP of 1.1 per cent in 2009 and growth of 3.1 per cent in 2010.
- Consumer prices in the US, the euro area, Sweden, Japan and China are falling. Core inflation is positive, with the exception of China and Japan.
- Australia’s central bank has increased its key rate by 0.25 percentage point to 3.25 per cent.
- In Norway, three-month money market rates have increased by 17 basis points. Money market rates have moved down in the euro area and the UK. In Norway and the US, premiums remain approximately unchanged. The interest rate differential against trading partners has widened somewhat and is now 1.5 percentage points. Long-term government bonds yields have declined both in Norway and abroad, with the exception of the US, where they have edged up.
- The import-weighted krone exchange rate index (I-44) has appreciated by 3.3 per cent. Market participants’ interest in NOK has increased and liquidity in the foreign exchange market has improved. So far in the fourth quarter, the average exchange rate has been 89.5, which is about 6.3 per cent stronger than projected in Monetary Policy Report 2/09.
- The main international stock indices have advanced. The Oslo Børs benchmark index has gained about 4 per cent.
- The spot price of Brent Blend oil has increased by a good 10 per cent. In the past five trading days, the spot price has averaged USD 77 per barrel. Futures prices for 2010 have been USD 82 per barrel over the past five trading days.
- The Economist commodity-price index has increased by 4 per cent in XDR (1) terms. In the same period, dry cargo freight rates increased by 25 per cent.
- The year-on-year rise in the consumer prices (CPI) was 1.2 per cent in September. 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 rate of increase was 2.4 per cent. Other indicators of underlying inflation ranged between 2.2 and 2.8 per cent. Overall, inflation has been somewhat higher than projected in the June Monetary Policy Report.
- According to house price statistics from the real estate industry, seasonally adjusted house prices rose by 1.6 per cent in September. House prices have increased by 6.8 per cent since September 2008 and 11.9 per cent since the price trough in November 2008. In September, seasonally adjusted house prices were 0.5 per cent higher than the peak in June 2007.
- In the National Budget the structural, non-oil central government budget deficit for 2010 is estimated at NOK 148.5 billion. This amounts to 5.7 per cent of the estimated value of the Government Pension Fund – Global at the beginning of 2010. In 2010 prices, government petroleum revenue spending increases by NOK 4.7 billion from 2009 to 2010, or about 0.6 per cent of mainland GDP. Growth in underlying government spending is estimated at 4.7 per cent. Measured in relation to the final budget for 2009, growth in central government budget spending is close to 8 per cent.
- Household spending increased by a seasonally adjusted 0.5 per cent from July to August, after rising by 2.6 per cent in the previous month. After falling through autumn 2008, spending on consumer goods has rebounded and is now somewhat higher than in the same period last year. Used car imports and the number of new car purchases rose by 13.4 per cent from August to September this year, adjusted for seasonal variations. Opinions ForbrukerMeter’s confidence indicator, which measures consumers’ perceptions of their own financial situation and the country’s economy, rose in September to its highest level since June 2007.
- According to the financial accounts for households and non-profit institutions serving households, household net lending came to negative NOK 24 billion in 2009 Q2, an increase from negative NOK 34 billion in the same quarter one year earlier. Total net lending for 2009 Q1 amounted to NOK 7 billion.
- Twelve-month growth in gross private sector indebtedness to domestic sources (C2) was 5.9 per cent in August. The corresponding figure for July was 6.5 per cent. Corporate debt – excluding financial undertakings – is on the decline, while household debt growth has been stable in recent months. Non-financial enterprises’ liquid assets (M2) – excluding financial undertakings – fell by 0.8 per cent in the year to August 2009.
- According to Norges Bank’s quarterly bank lending survey, banks report some easing in credit standards for enterprises in 2009 Q3. In the period ahead, banks expect a further easing of credit standards for the enterprise sector. Banks’ credit standards for households was unchanged in 2009 Q3 compared with 2009 Q2.
- According to building statistics, housing starts fell by 29.6 per cent in the year to August 2009. Measured by utility floor space, the decline was 27.5 per cent. Non-residential building starts fell by 51 per cent. The average monthly registration delay for housing starts was 2.6 months in August.
- The enterprises in Norges Bank’s regional network reported in September that the fall in production had come to a halt. They expect somewhat higher growth in production ahead. Employment in enterprises has declined, but to a lesser extent than in the two previous rounds. All industries report that operating margins have been reduced somewhat.
- Manufacturing production was a seasonally adjusted 1.1 per cent lower in the period June to August 2009 than in the previous three-month period. Manufacturing production rose by 0.8 per cent from July to August.
• The volume of traditional goods exports increased by a seasonally adjusted 6.2 per cent from 2009 Q2 to 2009 Q3. The volume of traditional goods imports excluding ships and oil platforms rose by a seasonally adjusted 3.2 per cent. Export prices for traditional goods rose by 1.7 per cent, while import prices fell by 0.4 per cent.
- Seasonally adjusted registered unemployment stood at 2.8 per cent in September, approximately unchanged since August. According to Statistics Norway's Labour Force Survey (LFS), seasonally adjusted unemployment was 3 per cent of the labour force in July, approximately unchanged since June. Employment fell by 9 000, while the labour force contracted by 8 000 from June to July. Unemployment has been considerably lower than projected in Monetary Policy Report 2/09.
The global economy is in a deep downturn, but there are signs of renewed growth. Activity in the Norwegian economy has picked up more rapidly than expected. Monetary policy measures, combined with petroleum investment and growth in public spending, have boosted activity. The downturn in the Norwegian economy may be relatively mild.
The key policy rate was reduced to prevent inflation from falling too far below target and to mitigate the impact of the global downturn on the Norwegian economy. Underlying inflation is now close to 2.5 per cent. It appears that unemployment in the years ahead will remain lower and wage growth somewhat higher than previously projected. Low productivity has probably squeezed profitability in many firms.
Interest rates are low, resulting in renewed growth in household consumption. At the same time, house prices are rising. Over time, household borrowing may surge again and saving may fall. With low productivity, higher corporate costs, growth in household demand and higher capacity utilisation, inflation may gradually become too high. This would indicate that the interest rate should be raised.
On the other hand, a marked increase in the interest rate in Norway and a wider interest rate differential between Norway and other countries may entail a risk of a stronger-than-projected krone, resulting in an inflation level that is too low. This would indicate that the interest rate should not be raised too rapidly.
The Executive Board’s strategy is that the key policy rate should be in the interval 1¼ - 2¼ per cent in the period to the publication of the next Monetary Policy Report on 24 March 2010 unless the Norwegian economy is exposed to new major shocks. The analyses in Monetary Policy Report 3/09 indicate that the key policy rate should thereafter be raised gradually. The Executive Board considered the alternative of increasing the key policy rate at the previous monetary policy meeting. The analyses in Monetary Policy Report 3/09 indicate that it is now appropriate to raise the key policy rate.
New information may reveal aspects of economic developments that suggest the Norwegian economy is following a different path than projected. Higher capacity utilisation or a weaker krone may, on the one hand, result in higher-than-projected inflation. On the other hand, inflation may be lower than expected if the krone remains strong or productivity picks up more rapidly than projected. Should the krone appreciate considerably more than projected, the interest rate may be increased to a lesser extent or later than currently envisaged.
The key policy rate is raised by 0.25 percentage point to 1.50 per cent with effect from 29 October 2009.
1) Special drawing rights IMF. At 26 October 1 XDR = NOK 8.84
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