The Executive Board's monetary policy decision – background and general assessment
Meeting 15 December 2010.
The Executive Board has placed emphasis on the following information since the previous policy meeting on 27 October:
- Activity in the world economy continues to increase. Growth is high in many emerging market economies, in Germany and in Sweden, while growth is moderate in most other OECD countries. For Norway’s trading partners overall, growth in the third quarter was somewhat stronger than envisaged in the October Monetary Policy Report.
- Underlying consumer price inflation is low in the euro area and in the US, but is rising in many emerging market economies. International food and commodities prices are increasing. Inflation expectations remain stable in most advanced countries.
- The Federal Reserve has announced a programme to purchase USD 600 billion of US Treasury bonds in the period to end-June 2011. The scope of the programme will be assessed in the light of economic developments.
- Long-term interest rates have risen markedly internationally, but remain at low levels.
- Borrowing rates have risen for Ireland, Greece, Spain, Italy and Portugal. Ireland has reached agreement with the EU and IMF on a financing programme of EUR 85 billion. Risk premiums on European bank bonds have risen somewhat. Various indicators of turbulence in equity and foreign exchange markets indicate that contagion effects on other markets have been limited so far. Nor do corporate bond rates seem to have been affected.
- Most international stock indices have risen.
- Three-month money market rates are approximately unchanged in the US and in the euro area.
- The spread between expected key rates and three-month money market rates (premiums) have shown little change in the US, but have risen somewhat in Europe. In Norway the premium is approximately 0.6 percentage point. So far in the fourth quarter, the premium is approximately as assumed in the October Report.
- Market participants’ key rate expectations one year ahead have risen somewhat in the US, Sweden and the UK, but have fallen somewhat in the euro area.
- The US dollar has appreciated, while the euro has depreciated.
- The spot price of Brent Blend oil has risen by 10 per cent in USD terms. The Economist commodity price index has increased by 10 per cent in XDR terms. (1)
- The three-month money market differential against trading partners is approximately unchanged at 1.6 percentage points.
- The import-weighted krone exchange rate (I-44) has appreciated by 1.1 per cent. So far in the fourth quarter, the krone exchange rate has been 0.4 per cent weaker than projected in the October Report.
- In the year to November 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 1.4 per cent, in line with the projection in the October Report. Other indicators of underlying inflation ranged between 1.0 and 2.3 per cent. According to Perduco’s expectations survey, there was no change in long-term inflation expectations.
- According to quarterly national accounts, mainland GDP increased by a seasonally adjusted 0.9 per cent from the second to the third quarter of 2010. This is in line with the projections in the October Report. Exports and private consumption increased more than expected, while investment was lower.
- Household spending on goods rose by a seasonally adjusted 0.2 per cent from September to October 2010, after a rise of 0.9 per cent the previous month.
- Gross domestic debt (C2) in the private and municipal sector rose by 5.4 per cent in the year to October 2010. Household debt rose by 6.3 per cent. Credit to non-financial enterprises rose by 2.0 per cent.
- According to house price statistics from the real estate industry, house prices rose by 6.5 per cent in the year to November 2010.
- According to figures from Norsk familieøkonomi, the weighted average interest rate on new residential mortgages has fallen from 3.63 per cent to 3.54 per cent. (2)
- In November, the enterprises in Norges Bank’s regional network reported marked growth in output and rising capacity utilisation through autumn. According to Statistics Norway, manufacturing output adjusted for seasonal variations was 0.4 per cent higher in the period between August and October than in the previous three-month period. Electricity output rose by 6.5 per cent in the same period.
- The enterprises in Norges Bank’s regional network expect fairly strong growth in output ahead. This is in line with enterprises’ expectations in Statistics Norway's business sentiment survey for manufacturing for the fourth quarter of 2010.
- According to Statistics Norway’s investment intentions survey, manufacturing investment is expected to remain approximately unchanged from 2010 to 2011. Investment in the electricity sector is expected to expand considerably. The investment intentions survey for oil and gas production indicates that investment in petroleum activities may be somewhat lower in both 2010 and 2011 than projected in the October Report.
- According to the quarterly national accounts, employment edged up in the third quarter of 2010. Enterprises in Norges Bank’s regional network expect a continued pickup in employment ahead.
- Seasonally adjusted registered unemployment was 3.0 per cent of the labour force in November, unchanged on October and approximately as projected in the October Report.
Activity in the global economy continues to increase. Growth has been higher than expected among several of Norway’s most important trading partners. On the other hand, uncertainty regarding developments in Europe persists due to fiscal problems in Ireland and several southern European countries. Borrowing rates for these countries are still high and there are signs that some vulnerable banks are being affected. However, contagion to other markets has so far been limited. Equity prices are holding up, and oil and commodity prices have risen. Inflation expectations are stable, but underlying inflation in the euro area and the US is low. Market participants expect central bank key rates to remain low for some time ahead.
According to the October Monetary Policy Report, the Executive Board’s monetary policy 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 Report on 16 March unless the Norwegian economy is exposed to new major shocks. Growth in the Norwegian economy has picked up as expected. Regional network contacts confirm that capacity utilisation is increasing, but that the level of activity is probably still somewhat lower than normal. Underlying inflation is around 1½ per cent, approximately as projected. Both the consideration of bringing consumer price inflation up to target and the consideration of stabilising developments in output and employment imply a low key policy rate.
The low interest rate level has not triggered an increase in household debt growth so far. The rise in house prices and consumer spending has picked up recently. The consideration of guarding against the risk of future financial imbalances that may disturb activity and inflation somewhat further ahead suggests that the key policy rate should not be kept low for too long.
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 13 December XDR 1 = NOK 9.18
2) New variable-rate residential mortgages of NOK 1 million, within 60 per cent of the purchase price
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