The Executive Board's monetary policy decision – background and general assessment
Meeting 23 October 2013.
Growth among Norway's main trading partners as a whole is fairly low, approximately in line with Norges Bank's projections. In emerging economies, growth is slowing, while many advanced economies are showing a gradual improvement. The recovery in the euro area seems to have taken hold to a certain extent, but unemployment remains high. In the US, the economy continues to recover at a moderate pace, but the federal budget situation has contributed to heightened uncertainty. Market expectations concerning key rates abroad have fallen somewhat.
The krone exchange rate has shown wide fluctuations in recent months. The krone has depreciated since mid-September, even though market expectations regarding the interest rate differential against other countries are virtually unchanged. Money and bond market premiums are broadly unchanged since the September Monetary Policy Report.
There have been few new indicators for the Norwegian economy published since mid-September. Household consumption of goods has risen less than expected and confidence indicators are still below their historical averages. House prices have levelled off. Credit growth has remained stable, but banks report that household credit demand has decreased. Developments in manufacturing have been broadly in line with expectations. Unemployment has been fairly stable. The National Budget for 2014 includes an increase in the structural non-oil deficit from 2013 to 2014, which is in line with the assumptions in the September Monetary Policy Report.
Consumer price inflation has shown wide variations in recent months. After two months of sharp increases in the twelve-month rise, consumer price inflation fell again in September. The twelve-month rise in consumer prices adjusted for tax changes and excluding energy products (CPI-ATE) was 1.7 percent in September. Underlying inflation is estimated to be between 1¾ and 2¼ percent.
Consumer price inflation in September was lower than projected in the September Monetary Policy Report. The projection in the Report was based on the assumption that the rise in the CPI this summer was influenced by temporary factors. Wide variations in CPI inflation will probably continue to occur through the remainder of the year. This partly reflects the changes in the methods of measuring price developments in food and beverages and house rents that are temporarily affecting CPI figures. Because of this factor, the Bank looks through these monthly variations in CPI inflation to some extent in its assessment of the inflation outlook.
The key policy rate is set with a view to keeping inflation close to 2.5 percent over time. At its meeting on 18 September, the Executive Board decided that the key policy rate should be kept unchanged at 1.5 percent and that it should be in the interval 1–2 percent in the period to the publication of the next Report on 5 December 2013, unless the economy is exposed to new major shocks. The key policy rate is low partly because interest rates abroad are low and there is a substantial spread between the key policy rate and the interest rates facing households and enterprises. The analyses in the September Report implied a key policy rate at today's level in the period to summer 2014, followed by a gradual increase to a more normal level. With this interest rate forecast, there were prospects that inflation would remain below 2.5 percent and that capacity utilisation would be close to a normal level in the years ahead.
Since the publication of the September Report, growth among Norway's trading partners as a whole has been approximately in line with expectations, but market participants now expect that it will take even longer for key rates abroad to increase. Capacity utilisation in Norway is still considered to be close to a normal level. New information received so far indicates that developments in the Norwegian economy are not substantially different from those assumed, but that household demand appears to have been somewhat weaker than expected. Consumer price inflation in September was lower than expected, and the twelve-month rise in consumer prices may continue to be somewhat lower than previously projected in the period ahead. On the other hand, the krone is considerably weaker than assumed. An overall assessment of the new information 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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