Rate effective from 18 June 2021:

• Policy rate: 0.00 %
• Overnight lending rate: 1.00 %
• Reserve rate: -1.00 %

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Email: presse@norges-bank.no

Activity in the Norwegian economy has picked up after the sharp fall in spring 2020, but higher Covid infection rates and stricter measures to contain it held back the recovery at the beginning of 2021. Since the March 2021 Monetary Policy Report, infection rates have declined and the pace of vaccination has accelerated. The authorities have begun a gradual reopening of society, and unemployment has fallen. Further easing of Covid-related restrictions will help a return to more normal economic conditions. This suggests that it will soon be appropriate to raise the policy rate from its current level.

Norges Bank’s Monetary Policy and Financial Stability Committee decided to keep the policy rate unchanged at 0% at the monetary policy meeting on 16 June. In the Committee’s current assessment of the outlook and balance of risks, the policy rate will most likely be raised in September.

Reopening of society is underway in many countries

Since the end of 2020, high infection rates and tighter Covid-related restrictions have weighed on economic activity among Norway’s trading partners. In both the euro area and the UK, activity fell in 2021 Q1, while US activity was supported by measures such as direct government payments to a large portion of US citizens. Overall activity among trading partners in Q1 was higher than projected in the March Report. Vaccination coverage in the US and many European countries is high, and since the end of April, infection rates have declined. This has allowed a gradual reopening of society in a number of countries. The easing of Covid-related restrictions will lift economic growth among trading partners in the coming quarters, and activity levels are expected to return to pre-pandemic levels in the course of autumn. In several emerging economies, especially India, infection rates have been high, but have recently declined there as well. New, more infectious virus variants still create uncertainty about the economic outlook.

Covid-related restrictions and supply problems during the pandemic have pushed up freight rates and commodity and producer prices. Underlying inflation among trading partners has been higher than projected in the March Report, and inflation expectations have risen. Overall consumer price inflation has risen sharply in a number of countries, but there are still prospects for moderate underlying inflation globally in the coming years.

The major central banks have not communicated material changes to monetary policy since March. Market-implied policy rate expectations among Norway’s trading partners have fallen a little. There are still expectations that policy rates will remain close to zero for some time ahead. Advanced economy equity markets have risen further since March. Long-term interest rates have moved down slightly in the US but are little changed in the euro area.

Oil and gas prices have risen since the March Report. Futures prices have also increased but still indicate some decline in both oil and gas prices in the coming years. The krone exchange rate, as measured by the import-weighted index I-44, is broadly unchanged since March, in line with the projections in the March Report.

Norwegian money market premiums have fallen and are lower than previously projected, but are expected to edge up again through autumn. Residential mortgage rates are approximately at the same level as in March. Market-implied rates indicate expectations that the policy rate will be raised gradually from autumn.

Easing of Covid-related restrictions lifts growth in Norway

After falling sharply in spring 2020, economic activity in Norway picked up through the rest of the year. The recovery stalled through autumn when infection rates rose again. Since the beginning of 2021, higher infection rates and tighter Covid-related restrictions have dampened activity further, and mainland GDP fell in 2021 Q1. The decline was most pronounced in services particularly affected by Covid-related restrictions, such as culture, hotels, restaurants, transport and some retail trade segments in a number of municipalities. Tighter travel restrictions have affected firms’ access to foreign labour, which has likely dampened output in manufacturing and construction. Overall activity rose a little again in April, but GDP was still 2.6% lower than prior to the pandemic, which was somewhat lower than projected in the March Report.

Through spring, infection rates in Norway have declined, and the authorities have again relaxed Covid-related restrictions. The pace of vaccination has picked up, and there are prospects that much of the adult population will be vaccinated in the course of summer. The reopening of society is expected to give a boost to economic activity, especially in service industries. The enterprises in Norges Bank’s Regional Network expect solid growth in all sectors in the coming six months, particularly in household services. 

Households have accumulated substantial savings over a long period of limited spending options, providing room for strong consumption growth. Card transaction data indicate that household consumption has jumped up recently. The investment plans of Regional Network enterprises indicate that mainland investment in the coming year will be higher than projected. Petroleum investment also appears to be somewhat higher ahead than expected earlier.

Tighter Covid-related restrictions led to an increase in the number of furloughed workers through winter, but unemployment has come down through spring and is now slightly lower than projected in the March Report. Long-term unemployment has remained high. Capacity utilisation appears to be somewhat higher than projected in March. Owing to the pandemic’s uneven impact on different sectors, it is difficult to assess the pressures in the economy overall.

Public support measures so far in 2021 have been more extensive than the Government assumed in the National Budget in autumn 2020. Further extensions of existing support schemes for households and businesses have been proposed in the Revised National Budget for 2021. Under the revised budget, public spending in 2021 will be higher than assumed in the March Report.

Over the past year, house prices have risen sharply, and housing market turnover has been high. Since the March Report, house price inflation has moderated and has been a little lower than projected. Household credit growth has also been slightly lower than expected.

Lower inflation

The underlying rise in prices measured by the consumer price index (CPI) adjusted for tax changes and excluding energy products (CPI-ATE) picked up through spring and summer 2020. CPI-ATE inflation has since declined in pace with the fall in imported goods inflation. In May, the 12-month rise in the CPI-ATE was 1.5%, which was lower than projected in the March Report. According to Norges Bank’s Expectations Survey, longer-term inflation expectations lie close to the 2% inflation target.

Higher energy prices contributed to a marked increase in 12-month CPI inflation towards the end of 2020 and into 2021. In recent months, CPI inflation has again come down a little. In May, the 12-month rise was 2.7%, which was lower than projected. Futures prices for electricity and fuel indicate that CPI inflation will moderate further through summer.

Average annual wages rose by 3.1% in 2020. A marked decline in the number of employees in low-wage sectors contributed to lifting the average wage level in 2020. With the reopening of society, many low-wage employees will return to work. This will lead to a reversal of the compositional effects, and as a result, growth in the average wage level in 2021 will likely be lower than in 2020. The norm for this year’s wage negotiation between the Norwegian Confederation of Trade Unions (LO) and the Confederation of Norwegian Enterprise (NHO) was 2.7%. The other wage negotiations that have been concluded have agreed on a wage increase close to this norm. Current wage statistics and signals from expectations surveys suggest that wage growth in 2021 will be a little higher than projected in the March Report. The outlook for wage and price inflation ahead is uncertain, partly owing to the potential emergence of bottlenecks and wage and price pressures as the economy reopens.

Rate hike in September

The operational target of monetary policy is annual consumer price inflation of close to 2% 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.

At the beginning of the year, higher infection rates and tighter Covid-related restrictions were holding back the recovery of the Norwegian economy. Through spring, the pace of vaccination has accelerated, and the authorities have begun a gradual reopening of society. Unemployment has fallen but remains high. There is still uncertainty regarding the evolution of the pandemic, but economic activity now seems to be rebounding sharply and somewhat faster than projected earlier.

Underlying inflation has slowed and is now below the 2% target. Higher global inflation and inflation expectations are creating uncertainty about inflation ahead. However, the krone appreciation since 2020 and prospects for moderate wage growth suggest that inflation in Norway will remain below target in the coming years. As long as capacity utilisation is rising, there is limited risk of inflation becoming too low.

In considering the trade-offs facing monetary policy, the Committee placed weight on the contribution of low interest rates to speeding up the return to more normal output and employment levels. This reduces the risk of unemployment becoming entrenched at a high level and helps return inflation towards the target. At the same time, a long period of low interest rates increases the risk of a build-up of financial imbalances. The Committee placed weight on the marked rise in house prices since spring 2020 but noted that house price inflation has recently moderated somewhat.

In the Committee’s assessment, the overall outlook and balance of risks imply a continued expansionary monetary policy stance. Further easing of Covid-related restrictions will help a return to more normal economic conditions. This suggests that it will soon be appropriate to raise the policy rate from the current level.

The policy rate forecast implies a gradual rate rise from autumn 2021. The rate path is slightly higher than in the March Report. Capacity utilisation is projected to exceed a normal level towards the end of 2021. Unemployment is projected to decline further and return to pre-pandemic levels in the course of 2022. Underlying inflation is projected to edge down over the next half-year, before rising to 1.6% towards the end of 2024. If the economic outlook changes, the policy rate forecast will also be adjusted.

The Committee decided unanimously to keep the policy rate unchanged at 0%. In the Committee’s current assessment of the outlook and balance of risks, the policy rate will most likely be raised in September.

 

Øystein Olsen
Ida Wolden Bache
Ingvild Almås
Jeanette Fjære Lindkjenn (absent)

16 June 2021