Rate decision December 2018
Release of the interest rate decision and Norges Bank's advice on the countercyclical capital buffer after the meeting of the Executive Board on 12 December 2018.
Policy rate kept unchanged at 0.75 percent
Norges Bank's Executive Board has decided to keep the policy rate unchanged at 0.75 percent.
The upturn in the Norwegian economy appears to be continuing. Spare capacity has gradually diminished, and capacity utilisation seems to be close to a normal level. Underlying inflation is close to the inflation target of 2 percent.
If the policy rate is kept at the current level for a long time, price and wage inflation may accelerate and financial imbalances build up. That would increase the risk of a sharp economic downturn further out. Raising the policy rate rapidly ahead could stifle the upturn and lead to higher unemployment and inflation that is too low. Uncertainty surrounding the effects of higher interest rates suggests a cautious approach to interest rate setting.
Overall, the outlook and the balance of risks imply a gradual interest rate increase in the years ahead. The policy rate forecast is little changed, but the fall in oil prices and weaker global growth prospects imply a slightly slower rate rise than in the September Report. Inflation is projected to remain close to target in the coming years, at the same time as unemployment remains low. The policy rate path will be adjusted in response to changes in economic prospects.
"Our current assessment of the outlook and the balance of risks suggest that the policy rate will most likely be raised in March 2019", says Governor Øystein Olsen.
Monetary Policy Report with financial stability assessment 4/18
- Monetary Policy Report
Advice on the countercyclical capital buffer 2018 Q4
Norges Bank has advised the Ministry of Finance to increase the countercyclical capital buffer to 2.5 percent, effective from 31 December 2019.
Household debt ratios are high and rising. Property prices have risen rapidly for many years and are now at historically high levels. As a result, financial imbalances have built up. Banks meet their capital targets and their profitability is solid.
In the 2018 Financial Stability Report, financial system vulnerabilities in Norway are assessed as having increased somewhat over the past year, primarily owing to rising commercial property prices. In addition, the stress test in the Report shows that banks would have to draw down their countercyclical capital buffer and some of the other buffers in order to maintain lending in the event of a pronounced downturn in the Norwegian economy. This suggests that a larger portion of the total buffer requirement should be time-varying.
EU regulations will be implemented in 2019, which will reduce the capital required to achieve the same risk-weighted capital ratio level. This means that banks can now withstand an increase in the buffer rate without having to make substantial adjustments.
"Banks should become more resilient during an upturn. Norges Bank has advised the Ministry of Finance to increase the countercyclical capital buffer to 2.5 percent", says Øystein Olsen.
In line with Norges Bank's advice, the Ministry of Finance decided today to increase the countercyclical capital buffer to 2.5 percent.
- Ministry of Finance press release
- Norges Bank's advice is issued in the letter: Advice on the countercyclical capital buffer 2018 Q4
- The decision basis for Norges Bank's advice is presented in Section 5 of the December 2018 Monetary Policy Report and Indicators of financial imbalances