The Executive Board's monetary policy decision – background and general assessment
Meeting 7 May 2014.
Economic growth among Norway's trading partners is still moderate, approximately in line with the projections in the March 2014 Monetary Policy Report. In emerging economies, growth has slowed, while many advanced economies are showing a gradual improvement. Uncertainty with regard to developments ahead has increased somewhat due to the situation in Ukraine, but the ripple effects have so far been limited. Market expectations with regard to key rates abroad have edged down, primarily driven by lower key rate expectations in Sweden and the euro area.
The krone has appreciated somewhat since March, as measured by the import-weighted krone exchange rate index (I-44), and has been in line with the projections in the March Report. Bank lending and deposit rates for households and enterprises have been reduced somewhat, and there are therefore prospects that the average bank lending rate may be slightly lower in the quarters ahead than assumed in the March Report. The banks in Norges Bank's April Survey of Bank Lending reported slightly higher household credit demand.
Developments in the Norwegian economy seem to be broadly in line with expectations. Registered unemployment is still fairly stable. A phone survey of a limited sample of enterprises in Norges Bank's regional network indicates that output growth has been somewhat weaker than they had envisaged in February, but that the overall outlook for output growth is broadly unchanged. At the same time, household consumption of goods in March was slightly higher than expected, although these figures are uncertain due to the timing of Easter. House price inflation has picked up again in recent months, and house prices are somewhat higher than projected. The pay increases negotiated in this year's wage settlement are in line with Norges Bank's projection for annual wage growth in the March Report.
Consumer price inflation has been approximately in line with projections. Consumer price inflation adjusted for tax changes and excluding energy products (CPI-ATE) was 2.6 percent in March. The twelve-month rise in prices over the past year has been pushed up by temporary factors such as changes in CPI methods. Norges Bank therefore expects the rise in prices to slow somewhat ahead. Underlying inflation is still estimated to be between 2 and 2½ percent. The factors driving the rise in consumer prices ahead are assessed to be broadly unchanged since the March Report.
The key policy rate is set with a view to keeping inflation close to 2.5 percent over time. At its meeting on 26 March, 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 19 June 2014, unless the economy is exposed to new major shocks. The analyses in the March Report implied a key policy rate at today's level in the period to summer 2015, followed by a gradual rise. With this interest rate forecast, there were prospects that inflation would remain somewhat below, but close to, 2.5 percent in the years ahead. Capacity utilisation was expected to edge down over the coming year, but to edge up again towards a normal level at the end of the projection period.
Since the publication of the March Report, banks have reduced lending rates and house prices have risen somewhat more than expected. On the other hand, expected key rates abroad have fallen. Economic developments in Norway and abroad have otherwise on the whole been in line with the projections in that Report. 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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