Financial markets are marked by turbulence in spite of the agreement reached by the euro area on a new loan facility for Greece and the US decision to raise the federal debt ceiling. Equity prices have declined markedly. Government bond yields in several European countries remain high. Long-term interest rates in Spain and Italy rose considerably before the ECB intervened this week with purchases of government bonds. Government bond yields in the US, Germany and a number of other countries, including Norway, have shown an appreciable decline. The price of bank funding has increased somewhat and money market premiums have drifted up. The Norwegian krone has been broadly in line with that projected in the June 2011 Monetary Policy Report.

The uncertainty surrounding future developments in the world economy has intensified. There are prospects of lower growth in many countries. Growth was surprisingly low in the US in the first half-year and unemployment has edged up again. In Germany and Sweden, activity has remained robust, but there are signs of a slowdown in a number of other European countries. Growth remains strong in emerging Asia. Consumer price inflation abroad remains fairly elevated as a result of the past rise in commodity prices, but inflation is no longer on the rise. Oil prices have declined. The expected future increase in central bank key rates has been moved forward in time both for the euro area, the US and the UK.

Growth in the Norwegian economy is solid. Unemployment has been fairly stable. House prices are still on the rise. Household credit demand has also increased, but is expanding at fairly moderate rate. Consumer price inflation has been somewhat lower than expected. Underlying inflation is now projected to range between 1¼ and 1½ per cent.

The key policy rate is set with a view to stabilising inflation close to 2.5 per cent over time. The key policy rate is low. In the June 2011 Monetary Policy Report, the key policy rate was projected to rise gradually ahead with a view to stabilising activity and inflation somewhat further ahead. At its meeting on 22 June, the Executive Board decided that the key policy rate should be in the interval 2¼–3¼ per cent in the period to the publication of the next Report on 19 October, unless the Norwegian economy is exposed to new major shocks. The Report also presented an alternative scenario with lower growth in the world economy, persistent turbulence in financial markets and where the interest rate increase in Norway was moved further ahead.

Developments in the Norwegian economy have been broadly in line with that projected in June. This suggests that the key policy rate should be raised further. On the other hand, inflation is low. The turbulence in financial markets has intensified recently and there are clear signs of weaker growth internationally. This also affects the outlook for the Norwegian economy.

An overall assessment of the outlook and the balance of risks suggests that the key policy rate be left unchanged at this meeting.

Decision

The key policy rate is left unchanged at 2.25 per cent.