Assessments

The Norwegian economy is growing at a solid pace, and capacity utilisation is rising. An interest rate that is kept at the current level for a long period might lead to a situation where capacity utilisation becomes too high further ahead. Bottlenecks may arise in some sectors of the economy, and the sharp rise in property prices and borrowing may persist for a longer period. This could be a source of instability in demand, output and inflation in the somewhat longer run. This implies, in isolation, a higher interest rate. At the same time, the current rate of inflation is low, and there are prospects of low inflation for a period ahead. The objective of bringing inflation back to the target of 2½ per cent and anchoring inflation expectations imply a continued expansionary monetary policy.

The monetary policy assessments presented by Norges Bank in March indicate that the interest rate will rise after a period and at a gradual pace. Economic developments since then have been broadly in line with expectations. International key rates are rising, albeit slowly and from a low level. Although a gradual rise in the interest rate seems to provide a good balance between the different objectives, the Executive Board has concluded that it is too early to increase the interest rate at this monetary policy meeting.

Outlook and risk factors

It appears that activity in the Norwegian economy will continue to rise fairly rapidly this year and next even though there has been evidence of some turbulence in domestic and international financial markets. Strong growth in petroleum investment will have spillover effects on the mainland business sector. As capacity utilisation in the economy increases, corporate profit margins may increase further. It also appears that unemployment might decrease further, and wage growth might rise somewhat after a period. The extraordinary factors that have contributed to restraining the rise in prices for imported consumer goods are expected to have a diminishing impact in the years ahead.

The March Inflation Report pointed to the risk that a low interest rate over a long period may gradually result in even stronger pressures in the economy. The Report also noted the possibility that continuing changes in trading patterns, with higher imports from Asia and stronger competition in retail trade, may prolong the period of low inflation. These uncertainties still apply. Since the previous monetary policy meeting, oil prices have varied, but have generally remained high.

The Executive Board's assessment in the March Inflation Report was that the sight deposit rate should be in the interval 1½ - 2½ per cent until the publication of the next Inflation Report on 30 June 2005, given economic developments are broadly in line with the projections. Developments over the past few weeks do not provide grounds for changing this perception of the state of the real economy. The first wage settlements seem to suggest that the negotiated pay increases are somewhat lower than projected by Norges Bank. Inflation, on the other hand, has been broadly in line with expectations, and there has been virtually no change in the krone exchange rate. The inflation outlook has not changed substantially since the March Inflation Report was published.

Economic developments

The Executive Board places particular emphasis on the following new information that has emerged since the previous monetary policy meeting on 16 March:

• In the US, growth seems to have remained solid in the first quarter. Heightened uncertainty with regard to developments in the US economy and weaker results for some large companies have resulted in falling prices on world stock markets. Developments are weaker in the euro area - unemployment remains high and consumer confidence has fallen. In Japan, it appears that growth will be positive from the fourth quarter of 2004 to the first quarter of 2005. Growth in the global economy is still expected to moderate somewhat this year and stabilise in the years ahead.
• Since the previous monetary policy meeting, interest rates have been raised in Iceland, the US and Hong Kong. Financial market expectations indicate gradual interest rate increases in a number of countries, but expectations have been reduced somewhat recently. The UK interest rate is now also expected to remain stable in 2005.
• Oil prices are high. Prospects of continued strong growth in demand for oil and limited excess production capacity are probably affecting oil prices. Diminishing petrol stocks in the US and fears of petrol shortages this summer have contributed to fluctuations in oil prices in the past month.
• Consumer price inflation adjusted for tax changes and excluding energy products (CPI-ATE) has been low in the first months of this year. In March, the year-on-year rise was 0.7 per cent, unchanged since February. Adjusted for the interest rate's direct effect on house rents, the year-on-year rise in the CPI-ATE is estimated at 0.9 per cent in March.
• Financial market participants are expecting a gradual rise in Norges Bank's key rate in the period ahead. There has been a slight downward shift in interest rate expectations since the previous monetary policy meeting.
• The number of employed has been approximately unchanged in recent months. Unemployment has also remained unchanged.
• Household demand appears to remain high, as projected in the previous Inflation Report. Goods consumption picked up sharply, as expected, from January to February. The upturn was broad-based, with strong growth in car sales, other goods and energy consumption.
• Prices in the office and commercial property sector fell slightly in the second half of last year, but were nevertheless 6.8 per cent higher than in the same period in 2003. The rise in house prices has also moderated, and prices in March were 8.2 per cent higher than in the same month last year. Housing construction activity is still high. In January and February, housing starts were 17.5 per cent higher than in the same period last year.
• Growth in household debt is high. Credit demand in the enterprise sector remains low.
• Information from our regional network indicates continued solid growth in all industries. Growth is reported to be strong in some oil-related industries and export industries, while the rate of growth in retail trade and services is slowing somewhat. All sectors report an increase in investment. Investment growth is picking up in the local government and health sectors. The private sector is expecting a somewhat higher rise in employment in the coming three months.

Charts - monetary policy meeting  (PPT, 1 271 kB)
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Charts - monetary policy meeting  (PDF, 150 kB)