A new set of forecasts for the economy was not prepared for the monetary policy meeting on 19 January. New information was assessed against the projections in Monetary Policy Report 4/21, which was published on 16 December.

In the December Report, the Committee’s assessment was that the policy rate would most likely be raised further in March. The forecasts implied a gradual further rate rise to around 1.75 percent in the course of the coming years. Rising infection rates and new containment measures were expected to result in temporarily lower activity and higher unemployment. It was assumed that infection rates would subside and containment measures eased further out and that the economic upswing would then continue. Capacity utilisation was projected to decline in the near term but be above a normal level in the coming years. There were prospects that underlying inflation would be close to the inflation target in the course of 2022.

High inflation and increased infection rates globally

The economic upswing among Norway’s trading partners is continuing, but GDP growth in 2021 Q4 appears to have slowed, broadly as projected in the December Report. The number of new Covid cases is rising sharply among many trading partners, with Omicron now the dominant virus variant. This variant appears to be less virulent than Delta and, together with good vaccination coverage, this is helping to reduce the need for hospitalisation among those infected compared with earlier in the pandemic. Very high infection rates are nevertheless weighing on activity in a number of countries.

A surge in energy prices, high demand for goods, a sharp rise in freight rates and long delivery times have contributed to a marked rise in headline consumer price inflation in many countries. Underlying inflation has also risen, particularly in the US and the UK, but has been broadly as projected for trading partners overall. Reported delivery times have shortened a little in a number of countries. Some freight rates have also fallen, but container shipping rates from China to Europe have remained high.

High inflation together with reduced uncertainty concerning the Omicron variant and signals of monetary tightening have lifted policy rate expectations among Norway’s main trading partners. Long-term sovereign bond yields have also risen since the December Report.

Gas prices have declined slightly from high levels, while oil prices have risen further. The krone has appreciated on the back of higher oil prices and has been somewhat stronger than projected in the December Report.

After the policy rate was raised to 0.5 percent in December, most banks have announced a further increase in residential mortgage rates. The money market premium has risen and is higher than the December projection. Norwegian forward money market rates have risen and indicate expectations of a further rise in the policy rate.

Increased infection rates and containment measures dampen activity in the Norwegian economy

The easing of containment measures through 2021 has led to a marked upswing in the Norwegian economy, and activity is higher than prior to the pandemic. Mainland GDP rose further in November and has been broadly as projected in the December Report.

Card transaction data indicate that rising infection rates and a tightening of containment measures in mid-December have dampened economic activity in recent weeks. The decline is especially pronounced in the service sector, which has been severely affected by the containment measures.

The Government has recently relaxed some of the extensive containment measures. Despite the substantial increase in infection rates in Norway, the number of new hospitalisations has not risen accordingly. The double dose vaccination rate is now 73 percent in Norway, and many have received a booster. This could reduce the need for protracted Covid restrictions. However, there is still uncertainty about the evolution of the pandemic and the extent of containment measures ahead.

The labour market continued to improve into December 2021. Employment rose considerably through autumn. The unemployment rate, seasonally adjusted, was unchanged between November and mid-December, at 2.3 percent of the labour force. Unadjusted weekly data from the Norwegian Labour and Welfare Administration (NAV) show a small rise in the unemployment rate after new containment measures were introduced. The number of both furloughed workers and ordinary unemployed has risen.

The Government introduced a number of fiscal support measures in December, including a wage support scheme for businesses affected by containment measures. Owing to the use of the wage support scheme and less uncertainty concerning the Omicron variant, unemployment could turn out somewhat lower than projected. The Government’s updated estimates of petroleum revenue spending in 2022 indicate that the structural non-oil budget deficit will be somewhat higher than assumed in the December Report.

House prices fell by a seasonally adjusted 0.2 percent between November and December and have been lower than projected. Sales of both new and existing homes remain high. Household credit growth has been broadly as expected.

Consumer price inflation has been higher than projected

The 12-month rise in the consumer price index adjusted for tax changes and excluding energy products (CPI-ATE) rose from 1.3 percent in November to 1.8 percent in December, more than projected in the latest Report. Both imported goods inflation and domestically produced goods and services inflation rose further and were higher than expected. The average of other indicators of underlying inflation were just above 2 percent.

High energy prices continue to lift the overall consumer price index (CPI). In December, the 12-month rise in CPI inflation was 5.3 percent, which was higher than projected. The rise in CPI inflation is being restrained by the electricity support scheme for households, which was introduced in December. Since then, the Government announced that it will increase electricity support further. After the December Report was published, electricity prices have fallen slightly, and electricity and fuel futures prices are a little lower overall than in December.

Further rate rise

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 upswing in the Norwegian economy continued through autumn. Recently, higher infection rates and extensive containment measures have held back activity. Unemployment has edged higher but appears to remain lower than projected in the December Report. Relaxations of containment measures will likely contribute to a continued economic upswing. Higher electricity prices have resulted in high consumer price inflation. Underlying inflation has risen more than expected and is now close to the inflation target.

Monetary policy is expansionary. In the Committee’s assessment, the objective of stabilising inflation around the target somewhat further out suggests that the policy rate should be raised towards a more normal level. A gradual normalisation of the policy rate is consistent with continued high employment. Higher interest rates will also help counter a build-up of financial imbalances.

In its discussion of the balance of risks, the Committee noted that while the Omicron variant appears to be less virulent than the Delta variant, there is still uncertainty about the further evolution of the pandemic. The Committee was also concerned with the risk of a potential rise in domestic price and wage inflation due to capacity constraints and persistent global price pressures.

The Committee decided unanimously to keep the policy rate unchanged at 0.5 percent. Based on the Committee’s current assessment of the outlook and balance of risks, the policy rate will most likely be raised in March.

Øystein Olsen
Ida Wolden Bache
Ingvild Almås
Øystein Børsum
Jeanette Fjære-Lindkjenn

19 January 2022

Charts - Monetary policy meeting - January 2022 (pdf)