The Executive Board's monetary policy decision – background and general assessment
Meeting 24 March 2010
The Executive Board has placed emphasis on the following new information that has emerged since the previous monetary policy meeting on 3 February:
- Activity has stabilised among most of Norway’s trading partners. However, growth rates still vary widely and growth is strongest in the Asian economies.
- Higher food and energy prices have pushed up consumer price inflation in many countries, but inflation is still low. Inflation expectations remain stable in most advanced economies.
- Expectations of the first key rate increases in the US and the euro area have been moved forward somewhat into the future. Market participants now expect an upward shift in key rates only at the end of the year.
- Long-term government bond yields in the euro area have fallen. Yield spreads in Greece, Ireland, Spain and Portugal compared with Germany widened markedly up to mid-February, narrowing thereafter. In the past week spreads have widened again somewhat.
- In Norway, three-month money market rates are approximately unchanged. The interest rate differential against trading partners is approximately unchanged at 1.7 percentage points.
- According to figures from Norsk familieøkonomi, most of the larger banks have raised residential mortgage lending rates (1) since Norges Bank increased the key policy rate for the first time on 28 October 2009. Weighted residential mortgage lending rates have increased by about ¼ percentage point.
- Risk premiums on banks’ long-term market funding have risen. According to DnB NOR’s estimates for traded prices, premiums on 5-year bank bonds have increased by 0.2 percentage point.
- The import-weighted exchange rate (I-44) has appreciated by 0.4 per cent. So far in 2010 Q1 the krone exchange rate has been 1.9 per cent stronger than previously projected.
- The main stock indices have advanced. Oslo Børs has remained approximately unchanged.
- The spot price of Brent Blend oil has risen by 9 per cent. In the past five trading days, the spot price has averaged USD 80 per barrel. The Economist commodity-price index is approximately unchanged, in XDR terms (2) . Dry cargo freight rates have increased by 24 per cent.
- In the year to February 2010 the consumer price index (CPI) rose by 3.0 per cent. Adjusted for tax changes and excluding temporary changes in energy prices (CPIXE) consumer prices rose by 2.1 per cent. Other indicators of underlying inflation were between 1.9 and 3.3 per cent. According to Perduco’s expectations survey, long-term inflation expectations were revised up somewhat by most groups in the survey in 2010 Q1.
- Seasonally adjusted registered unemployment was 3.0 per cent of the labour force in February, unchanged on January. According to Statistics Norway’s labour force survey (LFS), employment rose by 9000 in the period November to January compared with the three-month period to October 2009.
- Preliminary figures from the quarterly national accounts show that household consumption rose by a seasonally adjusted 1.3 per cent from 2009 Q3 to Q4. The index for household spending on goods rose by a seasonally adjusted 0.3 per cent from December to January.
- According to seasonally adjusted preliminary figures from household income accounts, the saving ratio excluding dividend income increased from 5.9 per cent in 2009 Q3 to 7.9 per cent in Q4. The saving ratio excluding dividend income was 5.8 per cent in 2009.
- Gross domestic debt (C2) in the private and municipal sector increased by 4.2 per cent in the year to January 2010, the same rate of increase as in the previous month. Credit to non-financial enterprises is still falling, while household credit growth picked up in January.
- Finanstilsynet (the Financial Supervisory Authority of Norway) has presented new guidelines for prudent residential mortgage lending. The guidelines state, among other things, that mortgage loans should not normally exceed 90 per cent of the market value of the dwelling.
- According to house price statistics from the real estate industry, house prices fell by a seasonally adjusted 1.2 per cent in February. House prices were 2.5 per cent higher in February than at the peak level in June 2007 and had increased by 14.1 per cent since the trough in November 2008.
- According to building statistics, the number of housing starts was a seasonally adjusted 1 per cent lower in the period November to January than in the three-month period to October 2009.
- According to order statistics for building and construction, the value of new orders rose by a seasonally adjusted 12 per cent from 2009 Q3 to Q4 (3). The value of order stocks rose by 5 per cent in the same period.
- Preliminary seasonally adjusted figures from the quarterly national accounts show that mainland GDP grew by 0.3 per cent from 2009 Q3 to Q4. This is lower than projected in the October Monetary Policy Report.
- The value of traditional merchandise exports increased by 2.3 per cent adjusted for seasonal variations in the period December to February compared with the previous three-month period. The value of traditional merchandise imports fell by 5.9 per cent in the same period.
- Seasonally adjusted manufacturing output in the period November to January was approximately unchanged compared with the previous three-month period. Output has fallen slightly over the past two months.
- According to order statistics for manufacturing, the value of new orders was approximately unchanged from 2009 Q3 to Q4, adjusted for seasonal variations. Order stocks fell by 9 per cent in the same period.
- According to Statistics Norway’s investment intentions survey for 2010 Q1, the value of investment in manufacturing, mining and electricity is estimated at NOK 37.3 billion in 2010. This is 4 per cent lower than in 2009.
- According to the 2010 Q1 investment intentions survey for oil and gas production, the value of investment in petroleum activities in 2010 is estimated at NOK 135.6 billion, approximately unchanged on 2009.
- The enterprises in Norges Bank’s regional network reported in February that output had risen slightly. Output growth was expected to pick up somewhat ahead. Employment is expected to remain unchanged, after falling slightly over the past three months. Operating margins have been approximately unchanged in the past three months. Growth in investment intentions was reported for the first time since spring 2008.
Output growth has resumed in most parts of the world. It appears, however, that the upturn in advanced economies will be moderate and that substantial spare output capacity and high unemployment will have an impact on the economies of many countries ahead. Interest rate expectations have fallen markedly in many countries.
In Norway, underlying inflation has slowed broadly in line with expectations and is now around 2 per cent. New information suggests that the recovery in the Norwegian economy is continuing, but capacity utilisation is probably somewhat lower than anticipated in autumn 2009. At the same time, the krone has been stronger. It appears that wage growth in 2010 will be lower than previously projected. Overall, these factors indicate that inflation may for a period be somewhat lower than expected earlier.
House prices have risen over the past year. New guidelines for prudent residential mortgage lending issued by Finanstilsynet (the Financial Supervisory Authority of Norway) may curb household debt accumulation. Over time, household debt accumulation may nevertheless increase considerably and saving may fall. The aim of guarding against the risk of future imbalances, that may disturb activity and inflation somewhat further ahead, suggests that the interest rate should be gradually brought closer to a more normal level.
On the other hand, a marked interest rate increase in Norway and a wider interest rate differential between Norway and other countries may entail a risk of a considerably stronger-than-projected krone, resulting in inflation that is too low. This will make it difficult to bring inflation up to target within a reasonable time horizon. This suggests that the interest rate should not be raised too rapidly.
The interest rate is set with a view to stabilising inflation over time close to 2.5 per cent. The analyses in Monetary Policy Report 1/10 indicate that the key policy rate should be raised gradually ahead, but somewhat later than expected in the October Report. 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 23 June 2010 unless the Norwegian economy is exposed to new major shocks. The Executive Board decided to keep the interest rate unchanged at today’s meeting. This is based on the assessment that inflation and capacity utilisation may for a period be lower than previously projected and that the interest rate should be increased somewhat later than expected in autumn 2009.
The key policy rate is kept unchanged at 1.75 per cent.
1) New variable-rate residential mortgages of NOK 1 million, within 60% of the purchase price
2) Special drawing rights, IMF. As of 22 March XDR 1 = NOK 9.10
3) Seasonal adjustment by Norges Bank
Press telephone: +47 21 49 09 30