The Executive Board's monetary policy decision – background and general assessment
Meeting 29 August 2012
Developments among Norway's trading partners are in line with the projections in the June 2012 Monetary Policy Report (2/12). Activity is declining in the euro area and the UK. The US economy is continuing to expand at a moderate pace. Growth is slowing in several emerging Asian economies. Oil prices and food commodity prices have risen recently, while other commodity prices have edged down.
The uncertainty affecting financial markets is still considerable and yields on presumably safe government bonds are very low. The European Central Bank (ECB) has communicated that it would, subject to certain conditions, consider buying government bonds from heavily indebted euro area countries. This prompted a fall in yields on Italian and Spanish government bonds in particular. Prices for European bank credit default swaps have moved down.
Central bank key rates are close to zero in many countries and there are prospects that they will remain low longer than previously anticipated. In the US, the Federal Reserve has reaffirmed that it will keep interest rates near zero until end-2014, and in the euro area market prices indicate that the short-term money market rate (EONIA) will be close to zero until end-2013.
The krone has recently appreciated against the euro, but has depreciated against the Swedish krona. The import-weighted krone exchange rate (I-44) is somewhat stronger than projected in the June Report.
Money market rates have fallen recently. Banks appear to have ample access to funding and bond premiums have edged down. Bank lending rates have nonetheless remained stable.
Developments in the Norwegian economy appear to have been broadly in line with projections through summer. Both employment and the labour supply are growing at a solid pace. Unemployment remains low and fairly stable. Capacity utilisation can be estimated to be slightly above a normal level. The contacts in Norges Bank's regional network report that activity has been approximately in line with expectations. Household debt and house prices are still rising somewhat faster than household income, in line with that projected.
Consumer price inflation has been slightly lower than projected. Underlying inflation is projected to be between 1 and 1½ percent.
The interest rate is set with a view to keeping inflation close to 2.5 percent over time. Developments abroad and a strong krone are contributing to keeping inflation at a low level. The Norwegian economy is growing at a solid pace, suggesting an upward drift in inflation further ahead. At its meeting on 20 June, 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 Monetary Policy Report on 31 October 2012, unless the Norwegian economy is exposed to new major shocks.
Developments through summer have been broadly in line with the projections in the June Report. Inflation in Norway has been slightly lower than projected and the krone has recently appreciated somewhat. The expected upward shift in interest rates abroad has been deferred further ahead. At the same time, premiums in money and bond markets have declined. An overall assessment of the outlook and the 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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