The Executive Board’s monetary policy decision – background and general assessment
Meeting 12 May 2011.
The recovery in the global economy is continuing, but unemployment remains high among several of Norway’s main trading partners. Developments vary widely across countries and regions. In emerging Asian economies, growth remains high, but there are signs of overheating. Activity in the US economy is also picking up, although unemployment is coming down slowly. There is strong growth in Germany and Sweden, while growth is declining and there is considerable uncertainty surrounding developments in Ireland, Portugal and Greece. Government bond yields in these countries have continued to rise, particularly in Greece.
Oil and commodity prices are high, resulting in rising inflation in many countries, particularly in emerging economies. Even though underlying inflation remains fairly low in most advanced economies, inflation expectations have risen one to two years ahead.
The European Central Bank and Sveriges Riksbank have raised their key rates. Interest rate expectations among Norway’s trading partners remain approximately unchanged for the coming years. The krone has varied to some extent, but remains strong.
The upturn in the Norwegian economy has gained a firm footing. Capacity utilisation appears to be close to a normal level. Unemployment is slightly lower than expected. At the same time, the labour force has expanded a little less than projected in March. There are prospects that wage growth in 2011 will be broadly in line with that projected or somewhat higher.
The interest rate is set with a view to stabilising inflation close to 2.5 per cent over time. Underlying inflation is 1¼ – 1½ per cent. Low inflation and a strong krone suggest that the key policy rate should be kept low. So far, the low interest rate level has not triggered a substantial increase in household borrowing, but house prices have risen. Housing starts have moved up sharply. There are prospects that both capacity utilisation and inflation will pick up over the year ahead. The consideration of stabilising activity and inflation somewhat further ahead suggests that the key policy rate should be raised.
The Executive Board refers to the projections and analyses in Monetary Policy Report 1/11, published in March, which suggest that the key policy rate should be raised gradually towards a more normal level. The Executive Board decided in March that the key policy rate should be in the interval 1¾ – 2¾ per cent in the period to the publication of the next Monetary Policy Report on 22 June unless the Norwegian economy is exposed to new major shocks. An overall assessment of the outlook and the balance of risks suggests that the key policy rate should be increased at this meeting.
The key policy rate is increased by 0.25 percentage point to 2.25 per cent with effect from 13 May 2011.
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