In Monetary Policy Report 3/20, which was published on 24 September, the Committee’s assessment was that the policy rate would most likely remain at the current level of zero percent for some time ahead. The policy rate forecast implied a rate at the current level over the next couple of years, followed by a gradual rise as activity approaches a more normal level. There were prospects that capacity utilisation would gradually increase and that the output gap would close 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 falling to close to 1.5 percent.

A new set of forecasts for the economy was not prepared for the monetary policy meeting on 4 November. New information was assessed against the projections in the September Report.

Increased infection rates fuel global uncertainty

Activity among Norway’s trading partners has picked up further. After a sharp fall in 2020 Q2, growth in Q3 appears to have been stronger than projected in the September Report. A significant increase in Covid-19 infection rates through autumn and stricter containment measures will likely weigh on the global upswing in the coming period. The result of the US presidential election is as yet unclear. The EU and the UK have still not reached agreement on a new trade deal.

Central banks are signalling that the monetary policy stance will remain very expansionary ahead. Trading partners’ forward rates are little changed since September and indicate expectations that policy rates will remain close to zero in the coming years.

Owing in part to the increase in infection rates, global equity indexes have edged down. Oil prices have declined and are lower than in September. At the same time, the krone has depreciated and is weaker than projected. The premium in the Norwegian money market has risen and is now slightly higher than expected. Estimated Norwegian forward rates are little changed and indicate expectations that the policy rate will remain at today’s level in the period to spring 2022.

The recovery of the Norwegian economy has continued
Activity in the Norwegian economy has picked up further after summer, but also in Norway, infection rates have risen and more containment measures have been introduced. Mainland GDP increased by 0.6 percent between July and August and was broadly as projected in the September Report. Manufacturing and commercial services in particular contributed to growth. At the end of August, the level of activity in the mainland economy was still close to 4 percent lower than before the pandemic broke out in March. Following strong growth in summer, overall household consumption fell in August, but the decline was somewhat less than projected in September. Goods consumption fell, but purchases of services picked up further. Despite rising for several months, services consumption remains considerably lower than in February. Under the Government’s proposed central government budget, petroleum revenue spending will decline in 2021 as extraordinary measures are phased out. The proposal entails lower petroleum revenue spending in 2021 than assumed in the September Report.

Activity in the market for existing homes has remained high, and new home sales have moved up markedly. House prices have risen more than projected in the September Report, while household credit growth has been as expected.

Registered unemployment has continued to fall, approximately as projected in September, primarily reflecting a decline in the number of furloughed workers. The wage settlement in autumn has been in line with the assumptions underlying the September Report.

Inflation has moderated and has been a little lower than projected. The 12-month rise in consumer prices adjusted for tax changes and excluding energy products (CPI-ATE) was 3.3 percent in September, while the rise in the consumer price index (CPI) was 1.6 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 gives weight to the fact that the Norwegian economy is in the midst of a deep downturn. So far, economic developments have largely been in line with the projections in the September Report. Activity has picked up further, but the level is still lower than prior to the pandemic. Unemployment has declined, but remains high. Increased Covid-19 infection rates and more containment measures abroad and in Norway will likely put a brake on the upswing in the coming period.

House prices have continued to rise. A long period of low interest rates increases the risk that financial imbalances are building up.

Underlying inflation has fallen, but is still higher than the inflation target. The effects of the krone depreciation earlier in 2020 are gradually fading. Together with prospects for low wage growth, this suggests that underlying inflation will moderate in the coming years.

In the Committee’s assessment, the sharp economic downturn and considerable uncertainty surrounding the outlook suggest keeping the policy rate on hold until there are clear signs that economic conditions are normalising.

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

4 November 2020

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