In Monetary Policy Report (MPR) 2/20, which was published on 18 June, the Committee’s assessment was that the policy rate would most likely remain at zero percent for some time ahead. The policy rate forecast implied a rate at that level over the next couple of years, followed by a gradual rise as economic conditions normalise. With such a policy rate path, there were prospects that capacity utilisation would gradually increase and approach a normal level towards the end of 2023. Unemployment was projected to edge lower, but to remain somewhat higher than prior to the pandemic. Underlying inflation was projected to lie above the inflation target over the next year, before gradually moving down to somewhat below 2 percent.

A new set of forecasts for the economy was not prepared for the monetary policy meeting on 19 August. New information was assessed against the projections in the June Report.

Sharp global downturn

Activity among Norway’s trading partners fell substantially in 2020 Q2, broadly as projected in the June Report. Activity and confidence indicators suggest that growth has picked up this summer. Inflation among trading partners has been a little higher than projected but remains low. Covid-19 continues to spread, especially in the US and Latin America. A number of countries that have managed to get the contagion under control are experiencing local outbreaks after coming out of lockdown. This contributes to uncertainty regarding the further recovery of the global economy. Oil prices have risen to around USD 45 and are a little higher than assumed in the June Report. Futures prices indicate a slight rise in oil prices in the years ahead.

Trading partners’ forward rates are little changed since June and indicate expectations that interest rates will remain close to or below zero in the coming years. Central banks are signalling a very expansionary monetary policy stance ahead. Global equity indexes have edged up.

The premium in the Norwegian money market has fallen a little since June and is close to pre-pandemic levels. Estimated forward rates have risen somewhat since the June Report. Market-implied rates indicate expectations that the policy rate will remain at today’s level in the coming year. Following a decline in residential mortgage rates in spring, interest rates offered by banks for residential mortgages point to unchanged rates through summer.

The krone has appreciated and is stronger than assumed in the June Report. The appreciation reflects the rise in oil prices, among other factors.

Activity in the Norwegian economy has picked up

The Norwegian economy is in the midst of a deep downturn. Following a considerable fall in mainland GDP between February and April, May data showed a rise of 2.4 percent. Output picked up especially in retail trade, personal services and the public sector. Households’ goods consumption rose further in June, and housing market turnover has been high this summer. Both house prices and household credit have increased more than expected. Economic activity overall appears to have picked up broadly as projected in the June Report.

Labour market developments appear to have been somewhat weaker than expected. Registered unemployment has continued to fall from a high level, broadly as projected. In July, unemployment edged higher, probably owing to normal seasonal effects. Statistics on the number of jobs and earnings indicate that employment may have fallen more than projected. The fall in employment appears to be greater than expected among low-wage workers. This lifts the average wage level and may imply that annual wage growth in 2020 will be higher than projected. This year’s wage settlement started at the beginning of August. Negotiations are currently under way in the manufacturing sector (the sector that sets the norm for wage increases in Norway).

The 12-month rise in consumer prices (CPI) fell slightly in July to 1.3 percent, approximately as projected in the June Report. Low CPI inflation reflects lower energy prices through the past year. Adjusted for tax changes and excluding energy products (CPI-ATE), inflation rose to 3.5 percent, which was higher than projected. Other indicators of underlying inflation also rose in July, averaging close to 3 percent.

Continued low policy rate

The operational target of monetary policy is annual consumer price inflation of close to 2 percent over time. Inflation targeting shall be forward-looking and flexible, so that it can contribute to high and stable output and employment and to countering the build-up of financial imbalances.

The Committee’s assessment is that new information largely confirms the picture of the economic developments presented in the June Report. The Norwegian economy is in the midst of a deep downturn. Activity has picked up in recent months but remains lower than prior to the pandemic. Unemployment has declined but is still high.

Overall inflation is low. At the same time, underlying inflation has risen and is higher than the inflation target. The krone appreciation and prospects for low wage growth suggest that inflation will moderate further out.

In its assessment of the balance of risks, the Committee gave weight to the considerable uncertainty surrounding the further economic recovery. Recently, the spread of Covid-19 has increased, and some containment measures have been reintroduced. The Committee also focused on housing market developments. Persistently high house price inflation may result in accumulating financial imbalances.

The Committee decided unanimously to keep the policy rate unchanged at zero percent. The Committee’s assessment of the outlook and balance of risks suggests that the policy rate will most likely remain at today’s level for some time ahead.

Øystein Olsen
Ida Wolden Bache
Jon Nicolaisen
Ingvild Almås
Jeanette Fjære-Lindkjenn

19 August 2020

Charts - monetary policy meeting (pdf)