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. Inflation remains low, but prices have risen approximately in line with projections after the unexpected fall at the beginning of the year. At the same time, the krone is relatively strong. 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 in the Inflation Report in March indicated that the interest rate will rise after a period and at a gradual pace. The assessments were based on market participants' expectations that the interest rate would be increased in the summer. A development where the interest rate rises gradually - in small, not too frequent steps - was considered to provide a good balance between the different objectives. The outlook for inflation and activity has not changed substantially since the March Inflation Report. As an alternative, the Executive Board considered increasing the interest rate already at this meeting. Nevertheless, the Executive Board did not find grounds - given the prospect of continued low inflation for a period ahead - to deviate from expectations in the money and foreign exchange markets at present.

Outlook and risk factors

Output in Europe in the near term may be somewhat weaker than projected. However, commodity prices are likely to remain high. This may contribute to dampening the effects on Norwegian output of potentially weaker developments abroad. Thus far, the number of employed in Norway has increased somewhat less than expected. Increased working hours, for example among part-time employees, and lower sickness absence have reduced the need to hire new staff. Low real interest rates, solid growth in private disposable income and high house prices are expected to continue to underpin household demand. Growth in household debt remains high. Growth in local government revenues has been relatively high. The outlook for economic activity in Norway has not changed substantially since the Inflation Report was published in March.

Developments in the krone exchange rate have been roughly in line with the assumptions in the last Inflation Report. Expectations concerning future interest rates have been adjusted downwards in a number of countries.

The rise in prices for Norwegian imports measured in foreign currency has been somewhat lower than expected. A weaker upturn abroad would increase the probability of a continued fall in prices for imported consumer goods. It appears that annual wage growth in 2005 will be somewhat lower than projected in the Inflation Report. The rise in prices for domestically produced goods and services is moving up. The Executive Board does not find any grounds for significantly changing its perception of the outlook for inflation.

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 that economic developments are broadly in line with projections.

Economic developments

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

• In the US, growth was solid in 2004 and in the first quarter of 2005. Employment is rising. Output growth in the euro area as a whole has been low in the last half year. There are no signs of improvement in the labour market. In the UK and Sweden, the upturn is moderate. In Japan, total output increased sharply in the first quarter. It appears that growth in China remains solid. Equity prices in the US and Europe have edged up again.
• In the US, the rise in consumer prices has continued to accelerate this year. The year-on-year rise in the national accounts' price index for personal consumption expenditures excluding food and energy was 1.7 per cent in March. In the euro area, underlying inflation is falling and was 1.3 per cent in April. Inflation is low in the Nordic countries. National accounts figures indicate that deflation gathered pace in Japan from the fourth quarter of 2004 to the first quarter of 2005.
• In the US, the Federal Reserve has increased the interest rate by 0.25 percentage point to 3 per cent. Financial market participants are expecting the US interest rate to continue to rise gradually. The interest rate in Canada is expected to rise in the autumn. On the other hand, market participants are expecting a reduction in the interest rate in Sweden in the summer and in the UK in the course of the next year.
• Oil prices have fallen somewhat since the last monetary policy meeting, but they are nevertheless high. Oil futures for delivery in six to seven years remain at more than USD 45 per barrel.
• Since the spring of 2004, consumer price inflation in Norway has picked up, albeit slowly. In April, the year-on-year rise in consumer prices adjusted for tax changes and excluding energy products was 0.8 per cent. After making adjustments for the introduction of maximum rates for day-care places and the direct effects of interest rates on house rents, inflation in April may be estimated at 1.0 per cent. According to TNS Gallup's second quarter survey, expected inflation five years ahead is still approximately 2½ per cent.
• The krone exchange rate (I-44) is at approximately the level prevailing at the time of the last monetary policy meeting.
• Financial market participants expect that Norges Bank will increase the interest rate in the summer and that it will subsequently be increased gradually. There has been little change in interest rate expectations since the last monetary policy meeting.
• Statistics Norway's Labour Force Survey indicates that employment, measured by number of persons, has been relatively stable this year. Registered unemployment declined slightly in April.
• Developments in goods consumption, car sales and statistics for retail trade turnover indicate on the whole a moderate increase in consumption. Due to the timing of Easter this year, it is difficult to interpret the goods consumption figures for the last months. Norges Bank's statistics for household financial accounts may indicate that demand growth in the Norwegian economy towards the end of 2004 was somewhat higher than indicated by the preliminary national accounts. TNS Gallups' consumer confidence indicator remains at a high level, but was slightly lower in the second quarter than in the first quarter. The high growth in household debt slowed somewhat in March.
• The rise in house prices edged up again in April. House sales are high and the time it takes to sell dwellings has diminished. Growth in housing construction was dampened in February and March, but in the first quarter, housing starts, by living space, were 27 per cent higher than in the first quarter of 2004.
• According to Statistics Norway's business tendency survey for the first quarter of 2005, output volume and new orders are increasing in both the domestic and export markets. Credit demand in the enterprise sector remains low.
• Wage settlements seem to suggest that the negotiated pay increases for 2005 are somewhat lower than projected by Norges Bank.
• In the Government's Revised National Budget proposal for 2005, the estimate for the structural, non-oil deficit for 2005 is NOK 65.3 billion, which is NOK 1.1 billion less than estimated in the National Budget for 2005. Nominal spending growth is estimated at 4.5 per cent. Local government's nominal revenues are estimated to rise by 4.6 per cent in 2005 after rising by as much as 6.8 per cent in 2004.

Charts - monetary policy meeting  (PPT, 949 kB)
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Charts - monetary policy meeting  (PDF, 150 kB)