The Executive Board’s monetary policy decision – background and general assessment
Meeting 21 Seprember 2011
The prospects for the global economy have weakened considerably in the course of summer. Growth is slowing and unemployment remains high. The high public debt levels and large fiscal deficits facing many countries pose major challenges and are likely to put a drag on growth over several years ahead. Inflation has slowed somewhat in the euro area but is still high in emerging economies. Energy and commodity prices remain at high levels.
Financial markets are marked by weaker growth prospects and uncertainty about developments in the world economy. The turbulence linked to the European debt crisis has intensified, as reflected in large movements in equity, bond and foreign exchange markets. The krone exchange rate has fluctuated considerably, but so far in the third quarter the krone has on average been broadly in line with that projected in the June 2011 Monetary Policy Report. Government bond yields in countries with weak public finances have increased. A higher probability of incurring losses on government bond investments has increased the counterparty risk for European banks. Bank funding has become more expensive and money market premiums have increased. Against the background of weaker growth prospects and financial market turbulence, key rate expectations abroad have been lowered markedly. The Federal Reserve has signalled that it will keep the federal funds rate close to zero over the next two years.
External developments and the turbulence in financial markets are affecting the prospects for the Norwegian economy. Domestic output and demand has been somewhat lower than projected even though growth remains robust. Unemployment has remained stable. Growth in private consumption has been lower than projected and household optimism has weakened. At the same time, housing investment has shown a substantial increase and house prices are still on the rise. Consumer price inflation has been lower than projected. Underlying inflation is now projected to range between 1 and 1¼ per cent.
The key policy rate is set with a view to stabilising inflation close to 2.5 per cent over time. In the June 2011 Monetary Policy Report, the key policy rate was projected to rise through the final half of this year. Low inflation, weaker output and employment prospects, higher money market premiums and very low foreign interest rates now suggest that the key policy rate should be held low for a longer period than projected in the June Report. There is an unusually high level of uncertainty surrounding the key policy rate ahead. If price and cost inflation moves up and growth prospects improve, the key policy rate may be raised. If the Norwegian economy is exposed to new major shocks, with a further deterioration in the outlook for growth and inflation, the key policy rate may be reduced.
An overall assessment of the outlook and the balance of risks suggests that the key policy rate be left unchanged at this meeting.
The key policy rate is left unchanged at 2.25 per cent.
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