The Executive Board's monetary policy decision – background and general assessment
Meeting 19 December 2012
Growth among Norway's trading partners is low. There is still considerable uncertainty surrounding further developments. Activity in the euro area may continue to recede into next year. In the US, housing and labour market conditions have continued to improve, but there is a high degree of uncertainty as to fiscal policy ahead. Growth rates for emerging economies seem to have picked up somewhat, primarily driven by higher activity in China. Oil prices remain high. Market expectations of key policy rates abroad have edged down.
Actions taken by euro area countries to improve the funding situation for heavily indebted countries in Europe have contributed to a continued fall in government bond yields for these countries. Risk premiums on bank bonds have declined. Money market premiums have been stable in recent weeks. Banks' access to market funding has improved.
In the fourth quarter, the import-weighted krone exchange rate (I-44) has on average been approximately in line with that projected in the October 2012 Monetary Policy Report.
Overall developments in the Norwegian economy have been broadly in line with the projections in the latest Report. Revised national accounts figures nevertheless imply that mainland annual GDP growth from 2011 to 2012 may be somewhat lower than projected in October. According to Norges Bank's regional network, output growth has drifted down slightly, but many enterprises report that they are facing capacity constraints. Employment is still on the rise and unemployment is low and stable. House prices and household borrowing are rising in line with that expected. Bank interest rates on loans to households and enterprises remain approximately unchanged. Capacity utilisation in the Norwegian economy is estimated to be above a normal level.
Consumer price inflation remains low and developments in recent months have been broadly in line with the projection in the October Report. Underlying inflation is still estimated to be between 1 percent and 1½ percent.
The key policy rate is set with a view to keeping inflation close to 2.5 percent over time. The key policy rate is low because inflation is low and interest rates abroad are very low. Developments in the Norwegian economy give reason to believe that inflation will gradually pick up. This suggests that the key policy rate can be raised further out. At its meeting on 31 October, the Executive Board decided that the key policy rate should be in the interval 1-2 percent in the period to the publication of the next Report on 14 March 2013, unless the Norwegian economy is exposed to new major shocks.
Since the publication of the latest Report, the growth outlook for Europe appears to have weakened somewhat. Market participants now expect that key policy rates abroad will be raised somewhat further ahead than previously envisaged. On the other hand, credit risk premiums have declined. Developments in the Norwegian economy have largely been in line with expectations.
An overall assessment of the outlook and balance of risks suggests that the key policy rate should be left unchanged at this meeting.
The key policy rate is kept unchanged at 1.5 percent.
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