The Executive Board's monetary policy decision – background and general assessment
Meeting 11 August 2010
The Executive Board has placed emphasis on the following information since the previous monetary policy meeting on 23 June:
- Growth in world trade and global manufacturing output has slowed somewhat, but overall activity has picked up somewhat faster than expected earlier this year, particularly in some European countries. Growth in emerging market economies is still strong. Unemployment remains high among our main trading partners.
- The IMF revised up its global growth forecasts for 2010 from 4.2 per cent in April to 4.6 per cent in July and maintained its growth forecast of 4.3 per cent for 2011.
- Underlying consumer price inflation is low in the euro area and the US. Inflation expectations are still stable in most advanced countries.
- US government bond yields have declined and the US dollar has depreciated.
- The differential between German and Greek 10-year government bond yields is approximately unchanged at 7.6 percentage points. For Spain and Portugal the differential has narrowed by up to 0.6 percentage point to 1.5 and 2.5 percentage points, respectively. Greece, Spain, Italy and Portugal have conducted successful auctions of government bonds in the market.
- On 23 July, the results of the stress tests on European banks were published. Seven of 91 banks did not satisfy the capital requirements. The tests have reduced the uncertainty surrounding the financial position of the banks.
- Key rates have been raised by 0.25 percentage point in Sweden, Canada and New Zealand. In the US and the UK, the expected increase in key rates has been moved further ahead. Overall, key rate expectations among our trading partners have shown little change. Short-term money market rates have edged up in the euro area.
- The leading stock indices and the benchmark index on Oslo Børs have advanced somewhat.
- The spot price of Brent Blend oil has risen by 7 per cent. In the past five trading days, the spot price has averaged USD 82 per barrel. The Economist commodity-price index has moved up by 5 per cent in XDR terms (1) . Copper and wheat prices have increased by 10 and 50 per cent, respectively.
- The import-weighted krone exchange rate (I-44) has appreciated by about 2 per cent. So far in the third quarter, the krone exchange rate has on average been broadly in line with that projected in the previous Monetary Policy Report.
- The interest rate differential against trading partners has narrowed somewhat and is now about 1.9 percentage points.
- The premium on three-month money market rates remains unchanged at 0.7 percentage point. So far in the third quarter, the premium has been slightly higher than assumed in the previous Monetary Policy Report.
- Risk premiums on banks’ long-term market funding have fallen. According to DnB NOR’s estimates for traded prices, premiums on 5-year bank bonds have decreased by around 0.2 percentage point. Premiums on OMF covered bonds are approximately unchanged.
- According to figures from Norsk familieøkonomi, weighted residential mortgage lending rates (2) are approximately unchanged.
- In the year to July 2010, the consumer price index (CPI) rose by 1.9 per cent. Adjusted for tax changes and excluding temporary changes in energy prices (CPIXE), consumer prices rose by 1.5 per cent. Other indicators of underlying inflation ranged between 1.3 and 2.4 per cent. Consumer price inflation was somewhat lower than projected in July.
- Registered unemployment stood at a seasonally adjusted 2.8 per cent of the labour force in July, unchanged on June and approximately as projected in the previous Monetary Policy Report. According to Statistics Norway’s labour force survey (LFS), employment rose by 5000 from the first to the second quarter of 2010. The labour force expanded by 9000 in the same period.
- Household spending on goods rose by a seasonally adjusted 1.1 per cent from April to May 2010, after falling by 0.9 per cent the previous month.
- According to financial accounts for households and non-profit institutions, household net lending was NOK 21 billion higher in the four quarters to the end of the first quarter of 2010 than in the four preceding quarters.
- In Norges Bank’s quarterly bank lending survey, banks reported broadly unchanged credit standards for households and enterprises in the second quarter of 2010.
- Twelve-month growth in gross domestic debt in the private and municipal sector (C2) was 4.6 per cent in June. Debt growth for non-financial corporations increased, while household debt growth slowed somewhat.
- According to house price statistics from the real estate industry, house prices rose by a seasonally adjusted 0.1 per cent in July. House prices were 4.8 per cent higher in July than at the peak level in June 2007 and had increased by 16.7 per cent since the trough in November 2008.
- According to building statistics, the number of housing starts was a seasonally adjusted 7 per cent lower in the period between March and May than in the three-month period to February 2010. The number of other building starts in the same period increased by 18 per cent. These statistics show wide fluctuations.
- Output in manufacturing and mining rose by 1.5 per cent from the first to the second quarter, adjusted for seasonal variations. Electricity output fell by 16.6 per cent in the same period. According to Statistics Norway’s business sentiment survey for manufacturing, business leaders expect output to edge up from the second to the third quarter this year.
- Traditional merchandise exports fell by a seasonally adjusted 0.5 per cent from the first to the second quarter. Traditional merchandise imports grew by 4.6 per cent in the same period. Imports of electricity in particular showed a substantial increase.
Growth in the world economy seems to have been somewhat stronger than expected, but the activity level in advanced economies remains low. Growth is strong in emerging market economies. Commodity prices remain high. Turbulence related to public finances in several European countries has receded. The outlook for the US economy seems somewhat more uncertain. Key rates in our trading partner countries are expected to remain low for a period ahead.
In Norway, consumer price inflation has slowed broadly in line with expectations. Underlying inflation is below 2 per cent. Activity in the Norwegian economy is rising moderately in line with the projections in the previous Monetary Policy Report. Unemployment remains fairly low, while capacity utilisation is probably still below a normal level. Both the consideration of keeping consumer price inflation close to 2.5 per cent and the consideration of stabilising developments in output and employment imply a low interest rate.
So far, the low interest rate level does not appear to be fuelling household debt growth. Household credit growth has gradually slowed and private consumption is growing at a moderate pace. The consideration of guarding against the risk of future financial imbalances that may disturb activity and inflation somewhat further ahead nonetheless suggests that the interest rate should be gradually brought closer to a more normal level.
The Executive Board’s strategy is that the key policy rate should be in the interval 1½–2½ per cent in the period to the publication of the next Monetary Policy Report on 27 October unless the Norwegian economy is exposed to new major shocks. Higher capacity utilisation or lower productivity growth may result in higher-than-projected inflation. On the other hand, inflation may be lower if developments abroad prove to be substantially weaker than expected or if the krone appreciates markedly.
Since the publication of the Monetary Policy Report in June, developments have been broadly in line with expectations. An overall assessment of the outlook and the balance of risks suggest that the key policy rate be left unchanged at this meeting.
The key policy rate is left unchanged at 2 per cent.
1) Special drawing rights, IMF. As of 9 August, XDR 1 = NOK 9.15
2) New variable-rate residential mortgages of NOK 1 million, within 60 per cent of the purchase price
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