Economic developments

The Executive Board has placed emphasis on the following new information that has emerged since the previous monetary policy meeting on 16 December 2009:

• Growth picked up among trading partners in the fourth quarter, but the level of economic activity is still low in many countries. Unemployment is high. The IMF has revised up its growth forecasts for the world economy in 2010 from 3.1 per cent to 3.9 per cent. 
• After rising in the period to mid-January, equity prices have recently fallen back somewhat. In the US, the UK and Norway, equity prices remain broadly unchanged since the previous monetary policy meeting, while they have declined somewhat in Germany. 
• The spot price for Brent Blend oil is approximately unchanged. In the past five trading days, the spot price has averaged USD 71 per barrel. The Economist commodity-price index has increased by 4 per cent in XDR (1) terms. Dry cargo freight rates have fallen by 15 per cent.
• As a result of higher food and energy prices, consumer price inflation has picked up in many countries, but inflation is low. Inflation expectations remain low in most advanced economies.
• Market expectations with regard to central bank key rates have shown little change. Market participants expect central banks in the US, the euro area and the UK to keep key rates unchanged in the period to summer and raise them gradually thereafter. 
• Long-term government bond yields are still low, but risk premiums have risen for countries with substantial government debt, particularly Greece but also Spain, Portugal, Italy and the UK. 
• In Norway, three-month money market rates have risen by 0.24 percentage point. The interest rate differential against trading partners has risen by 0.2 percentage point and is now 1.7 percentage points. 
• According to Norsk familieøkonomi, mortgage lending rates (2) have been increased by 17 of the 20 largest banks since Norges Bank first raised the key policy rate on 28 October. Weighted residential mortgage lending rates have increased by 0.23 percentage point. 
• The krone appreciated up to mid-January, but has since depreciated somewhat. At end-January, the krone was a good 1.3 per cent stronger than projected for the first quarter in the October 2009 Monetary Policy Report. 
• The year-on-year rise in the consumer price index (CPI) was 2.0 per cent in December 2009. Adjusted for tax changes and excluding temporary changes in energy prices (CPIXE), consumer prices rose by 2.4 per cent. Other indicators of underlying inflation ranged between 2.3 and 2.7 per cent. The rise in consumer prices has been approximately in line with projections. 
• Seasonally adjusted registered unemployment was 3.0 per cent of the labour force in January, up from 2.9 per cent in December and approximately as expected. According to Statistics Norway’s labour force survey (LFS), employment fell by 20 000 from July to October, somewhat more than projected in the October Monetary Policy Report.
• Household spending on goods rose by a seasonally adjusted 2.1 per cent from November to December, after falling by 1.4 per cent the previous month. Overall growth in goods consumption has been somewhat higher than expected in recent months. 
• According to Norges Bank’s quarterly bank lending survey, bank credit standards for enterprises were eased further in 2009 Q4. Gross domestic debt (C2) increased by 4.1 per cent in the twelve months to December 2009. The corresponding figure for November was 4.8 per cent. Debt growth in December fell for both non-financial corporations and households. 
• According to house price statistics from the real estate industry, house prices rose by a seasonally adjusted 0.2 per cent in January. House prices were 3.9 per cent higher in January than at the peak level in June 2007 and had increased by 15.7 per cent since the trough in November 2008. 
• According to OPAK’s property report for the second half of 2009, rental and market prices for office premises in Oslo levelled off in 2009. Rental prices for centrally located high-standard premises in Oslo have fallen by 6 per cent since the peak in 2007. Market prices for this category of premises have fallen by 23 per cent since prices peaked in 2007.
• According to building statistics, the number of housing starts was a seasonally adjusted 5 per cent higher in the period September to November than in the previous three-month period. Housing and other building starts fell by 32 and 25 per cent respectively in the year to November 2009.
• Seasonally adjusted manufacturing output was 2.3 per cent higher in the period September to November than in the previous three-month period. According to Statistics Norway’s business tendency survey, manufacturing leaders expect production, order intake and order reserves to remain approximately unchanged from 2009 Q4 to 2010 Q1.
• Norges Bank’s regional network has collected new information from enterprises in manufacturing and the building and construction industry. The activity level is still low and employment and investment are expected to fall. The picture is broadly the same as earlier. 
• According to the Norwegian Petroleum Directorate, petroleum investment is projected to fall from around NOK 141 billion in 2009 to around NOK 135 billion in 2010 at 2009 prices. Investment is then expected to decline somewhat further in 2011 and is projected at about the same level in 2012 and 2013 as in 2009.
• The volume of traditional exports rose by 1.4 per cent from the third to the fourth quarter adjusted for seasonal variations. The volume of merchandise imports, excluding ships and oil platforms, fell by 1.2 per cent. Export prices declined by 3.0 per cent in NOK terms, while import prices dropped by 1.6 per cent.

Assessment

The world economy is rebounding, but the level of activity is low and unemployment is high in the US and many European countries. Growth will probably hold up in emerging economies, while growth in the US and Europe is likely to be moderate. Consumer price inflation has edged up. Commodity and financial markets have fluctuated recently. The outlook for economic developments ahead remains uncertain, particularly for countries with substantial government debt. Key rates are close to zero in many countries and are expected to remain low for some time ahead.
 
Monetary policy in Norway is oriented towards consumer price inflation of close to 2.5 per cent over time. Consumer price inflation has been broadly in line with expectations. Underlying inflation is now slightly below 2.5 per cent, but will probably move down in the period to summer. The krone appreciated up to mid-January, but has since depreciated somewhat. Consumer price inflation is expected to move up again as a result of low productivity growth, increased business costs, growth in household demand and higher capacity utilisation.

In line with expectations, activity in the Norwegian economy has increased, but capacity utilisation is still lower than normal. House price inflation is high and growth in household credit remains relatively strong. Household demand seems to be increasing broadly in line with that projected in the previous Monetary Policy Report. Exports seem to have picked up somewhat faster than expected. On the other hand, petroleum investment may be lower than projected. Unemployment is broadly in line with that projected, but both employment and the labour force have decreased somewhat further than anticipated.

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 the October Monetary Policy Report indicate that the key policy rate should thereafter be raised gradually. 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 key policy rate may be increased to a lesser extent or later than envisaged in October.
 
Since the publication of the October Monetary Policy Report, developments in the Norwegian economy have been broadly in line with projections. Low capacity utilisation and continued uncertainty surrounding the economic outlook are being counteracted by a low interest rate. The economic recovery at home and abroad has taken hold and Norges Bank has raised the key rate in two increments to 1.75 per cent. The Executive Board decided to leave the interest rate unchanged at this meeting.

Decision

The key policy rate is kept unchanged at 1.75 per cent.

Footnotes

1) Special drawing rights, IMF. As of 1 February XDR 1 = NOK 9.13
2) New variable-rate residential mortgages of NOK 1 million, within 60% of the purchase price
3) A limited survey by phone was conducted in the third week of January. See summary under Publications/Regional network at www.norges-bank.no