The Executive Board’s monetary policy decision – background and general assessment
Meeting 26 January 2011.
The world economic recovery continues. Growth has been higher than expected among several of Norway’s most important trading partners, but is still too weak to reduce unemployment substantially. In a number of emerging market economies, activity is high and inflation is rising. Strong growth in Germany is contributing to holding up growth in the euro area as a whole. On the other hand, uncertainty regarding developments in the public finances of Ireland and several southern European countries remains high. Government bond yields have risen further in these countries through autumn and winter.
Interest rates abroad have risen since October, but are still low. Long-term rates are now in line with projections in the October Monetary Policy Report (3/10). The krone has been somewhat stronger than projected and money market premiums somewhat higher.
Although the sharp increase in energy and commodity prices has led to rising consumer price inflation abroad, underlying consumer price inflation remains low among most of Norway’s trading partners. Inflation expectations are stable. The increase in energy and commodity prices may push up inflation further. Higher energy prices have also resulted in a pickup in consumer price inflation in Norway. Underlying inflation is around 1½ per cent, approximately in line with projections in the October Report.
The enterprises in Norges Bank’s regional network confirm that growth in the Norwegian economy has gained a foothold, in line with the projections in the October Report. Household demand appears to have strengthened somewhat more than expected and housing starts have picked up. Unemployment is, as expected, stable, and the enterprises in Norges Bank’s regional network report moderate growth in employment.
The interest rate is set with a view to stabilising inflation close to 2.5 per cent over time. According to the October Monetary Policy Report, the Executive Board’s monetary policy 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 Report on 16 March unless the Norwegian economy is exposed to new major shocks.
Underlying inflation is low. Capacity utilisation in the economy appears to be increasing, but is still probably lower than normal. Both the consideration of bringing consumer price inflation up to target and the consideration of stabilising developments in output and employment imply a low key policy rate.
The low interest rate level has not triggered a substantial increase in household borrowing so far, but the rise in house prices and consumer spending has picked up. The consideration of guarding against the risk of future financial imbalances that may disturb activity and inflation somewhat further ahead suggests that the key policy rate should not be kept low for too long. On the other hand, a strong krone may lead to inflation becoming too low.
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 per cent.
Information that has emerged since the previous policy meeting on 15 December 2010
- For Norway’s trading partners overall, it appears that growth in the second half of 2010 was somewhat higher than projected in the October Monetary Policy Report (3/10). In January, the IMF revised up its growth forecasts for the world economy from 4.8 to 5.0 per cent for 2010 and from 4.2 to 4.4 per cent for 2011. The forecast for 2012 was unchanged at 4.5 per cent. The IMF published its previous forecasts in October 2010.
- Consumer price inflation abroad has increased in recent months. The rise in energy and food prices is particularly strong in emerging market economies. Underlying consumer price inflation remains low among Norway’s most important trading partners. Long-term inflation expectations are stable in most advanced economies.
Equities and commodities
- The spot price of Brent Blend oil has risen by 7 per cent in USD terms.
- The Economist commodity price index has increased by 8 per cent in XDR terms. (1)
- Most international stock indices have risen since autumn 2010.
- The spread over German 10-year government bond yields has widened for Portugal, Ireland and Belgium and narrowed for Greece, Italy and Spain. Greek 10-year government bond yields are 8.1 percentage points higher than German, while Irish and Portuguese are 5.7 and 3.8 percentage points higher, respectively.
- Long-term interest rates fell in autumn 2010, but rose again towards year-end. Ten-year government bond yields are 3.4 per cent in the US and 3.2 per cent in Germany.
- Market participants’ key rate expectations have fallen somewhat in the US, while they have risen somewhat in the euro area, the UK and Sweden. Compared with the October Report, key rate expectations have risen in both the US and the UK. Very short-term expectations have fallen somewhat in the euro area.
- Three-month money market rates are unchanged in the US and in the euro area, at 0.3 and 1.0 per cent, respectively.
- The risk premium on Spanish, Portuguese and Italian covered bonds has risen to 2.5, 4.3 and 1.4 percentage points, respectively.
- Credit default swap (CDS) prices for European financial institutions, as measured by the iTraxx index, have fallen by 4 per cent.
- In Norway the spread between three-month money market rates and the expected key policy rate (the premium) is approximately 0.6 percentage point. So far in the first quarter, the premium is somewhat higher than assumed in the October Report.
- The three-month money market differential against trading partners is 1.6 percentage points, approximately unchanged.
- According to figures from Norsk Familieøkonomi, the weighted average interest rate on new residential mortgages is unchanged at 3.54 per cent. (2)
- The euro (EUR) has appreciated by about 0.9 per cent, while the US dollar (USD) has depreciated by1.8 per cent. The Swiss franc (CHF) and the Chinese yuan (CNY) have depreciated by 0.8 and 0.5 per cent respectively. All exchange rate changes are stated at effective exchange rates.
- The import-weighted krone exchange rate (I-44) has depreciated by 0.3 per cent. So far in the first quarter, the krone has been 1.6 per cent stronger than projected in the October Report.
- In the year to December 2010 the consumer price index (CPI) rose by 2.8 per cent, up from 1.9 per cent in November. This was 1 percentage point higher than projected in the October Report.
- Adjusted for tax changes and excluding temporary changes in energy prices (CPIXE), consumer prices rose by 1.5 per cent, up from 1.4 per cent in November. The December figure was 0.2 percentage point higher than projected in the October Report. Other indicators of underlying inflation ranged between 1.0 and 1.8 per cent.
Output and demand
- According to the enterprises in Norges Bank’s regional network, growth in activity in the period from November up to the present has been in line with expectations. Market prospects for building and construction and the service industries have improved somewhat. (3)
- Manufacturing output adjusted for seasonal variations increased by 0.9 per cent from October to November. Output was 0.2 per cent higher in the period between September and November than in the previous three-month period.
- According to the Norwegian PMI (Purchasing Managers Index), activity continued to grow in December, but at a somewhat slower pace than in November. The Norwegian PMI fell from 55.7 in November to 54.4 in December.
- Household spending on goods rose by a seasonally adjusted 2.1 per cent from October to November 2010, after a rise of 0.4 per cent the previous month.
- According to building statistics, the number of housing starts was a seasonally adjusted 7 per cent higher in the period between September and November than in the previous three-month period. The number of other building starts fell by 3 per cent in the same period.
- Registered unemployment was a seasonally adjusted 2.9 per cent of the labour force in December, down from 3 per cent in November, approximately as projected in the October Report.
- According to Statistics Norway’s labour force survey (LFS), both employment and unemployment were 1 000 higher in the period between September and November than in the previous three-month period.
Domestic credit and house prices
- Twelve-month growth in gross domestic debt in the private and municipal sector (C2) was 5.9 per cent in November 2010. Household debt growth was 6.4 per cent. Debt growth for non-financial corporations was 3 per cent.
- Norges Bank’s Q4 bank lending survey showed increased credit demand from both households and enterprises. Banks’ credit standards for households and enterprises were approximately unchanged. Banks expect increased corporate credit demand ahead.
- According to house price statistics from the real estate industry, house prices rose by 6.7 per cent in the year to December 2010. In real terms, seasonally adjusted house prices are approximately 0.1 per cent below the peak in June 2007. (Corrected 28 January 2011.)
1) Special drawing rights, IMF. As of 24 January, XDR 1 = NOK 9.04
2) New variable-rate residential mortgages of NOK 1 million, within 60 per cent of the purchase price
3) A phone survey was conducted in the period 10-12 January 2011. See separate summary under Publications/Regional network
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