Assessments

Inflation has picked up recently, but is still below target. The key rate is low. Growth in the Norwegian economy is solid. The unusually low interest rate and developments in inflation and output imply that further interest rate reductions are now less likely. According to the monetary policy strategy for the period to mid-March, drawn up at the beginning of November, the prospect of continued low inflation for a period ahead implied that wide deviations from projected economic developments would be required before interest rates should be increased. Economic developments in Norway have been broadly in line with projections in the November Inflation Report. The prospect of continued low inflation in Norway implies that we should lag behind other countries in setting interest rates at a more normal level.

The objective of monetary policy is consumer price inflation of close to 2½ per cent over time. In the conduct of monetary policy, emphasis is also placed on curbing fluctuations in output and employment.

Outlook and risk factors

Economic growth among our trading partners last autumn seems on the whole to have been broadly in line with projections in the November Inflation Report , or perhaps slightly weaker. Aggregate demand and output in Norway have developed approximately as expected. It appears that investment in the petroleum sector will increase somewhat more in the years ahead than we have assumed. Inflation is picking up broadly in line with expectations. The inflation outlook in Norway has not changed substantially since the November Inflation Report was published.

The Executive Board would place particular emphasis on the following factors:

• Higher consumer price inflation reduces in isolation the risk that inflation expectations might fall.
• There is a risk that expected interest rate increases abroad will be postponed, due to possibly weaker growth.
• Prices for imported consumer goods, according to External Trade Statistics, have often provided an indication of developments in prices for imported consumer goods in the consumer price index. Prices for imported consumer goods fell, according to External Trade Statistics, in the third and fourth quarters of 2004.

Economic developments

The Executive Board also places particular emphasis on the following new information that has emerged since the previous monetary policy meeting on 15 December:

• Economic growth in the US was slightly lower towards the end of 2004, but remains relatively strong. Growth in parts of Asia appears to have remained strong towards the end of 2004. Weak developments from the third quarter in much of Europe and Japan seem to have persisted. Output growth in the UK picked up in the fourth quarter. In Sweden, the rise in GDP seems to have slowed somewhat in the fourth quarter of 2004.
• Underlying inflation in the US, the euro area and the UK has remained just below 2 per cent. In Sweden, Denmark and Finland, underlying inflation is below 1 per cent.
• Market participants now expect a more rapid tightening of monetary policy in the US. The key rate in the euro area is expected to be raised in the fourth quarter of this year. Low inflation in Sweden has contributed to current market expectations that Sweden's key rate will not be raised until late 2005.
• After falling at the beginning of December, oil prices have picked up. The rise in oil prices is mainly due to colder weather in North America and indications that OPEC has reduced production so far this year. Oil futures prices 6-7 years ahead have also risen again.
• Inflation in Norway, as measured by the CPI-ATE, increased last autumn. The year-on-year rise was 1.0 per cent in December, as in the previous month. Adjusted for the interest rate's direct effect on house rents and changes in day-care rates, underlying inflation for the past twelve months may be estimated at 1¼ per cent.
• The value of the Norwegian krone, as measured by the I-44, rose through the autumn of 2004. Since the previous monetary policy meeting in mid-December, however, the Norwegian krone has depreciated slightly.
• Financial market participants in Norway expect a stable interest rate level through the first half of 2005. The interest rate in Norway is expected to be lower than among trading partners up to autumn 2006. Expectations concerning the key rate in Norway and concerning the interest rate differential against other countries have remained virtually unchanged since mid-December.
• The goods consumption index increased considerably in November and in December. The rise in December is mainly due to a sharp increase in car purchases. The reason for some of this increase may be that some car purchases were brought forward in response to planned tax changes from the beginning of 2005. In the period to August, retail sales statistics, based on VAT payments, showed somewhat stronger consumer demand for goods than indicated by the goods consumption index.
• The sharp increase in residential construction is continuing. House prices rose by 10.1 per cent in the year to January 2005. The rise was somewhat more subdued at the beginning of the year, according to real estate industry statistics. Household credit demand edged up further in December.
• Statistics Norway's business tendency survey for the third quarter of 2004 shows that Norwegian industrial leaders continue to expect growth into the first part of 2005. Commercial building starts are picking up. Corporate demand for credit increased somewhat last autumn. The volume of traditional merchandise imports fell somewhat from the third to the fourth quarter, while the volume of traditional merchandise exports continued to increase. Projections from the Ministry of Petroleum and Energy confirm strong growth in investment in the petroleum sector in 2005. It would appear that petroleum investment will remain at a high level for a somewhat longer period than previously assumed and in 2007 and 2008.
• Employment is still on the increase. Measured in terms of person-hours worked, the rise is substantial, which is to some extent related to a marked decline in sickness absence. Developments in employment may indicate that growth in labour productivity measured by person-hours were somewhat weaker in 2004 than assumed in the previous Inflation Report. Unemployment is edging down.

Charts - monetary policy meeting (818 Kb)
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Charts - monetary policy meeting (132 Kb)