Developments in output, demand and underlying inflation have been broadly in line with the overall picture in the June Inflation Report. There are expectations of continued strong growth in the Norwegian economy. It also seems likely that inflation will remain low for a period ahead.

The objectives of bringing inflation back to the target of 2.5 per cent and anchoring inflation expectations imply a continued low interest rate. The krone exchange rate appreciated somewhat following the interest rate increase in June.

On the other hand, output growth is high. The objective of stabilising developments in output may, in isolation, imply a higher interest rate. High capacity utilisation may generate a continued sharp rise in property prices and household borrowing. This could be a source of instability in demand and output in the somewhat longer run.

The Executive Board's assessment in the June Inflation Report was that the interest rate may gradually - in small, not too frequent steps - be brought up towards a more normal level if economic developments are approximately as projected in the Report. Such an interest rate path was considered to provide a reasonable balance between the objective of stabilising inflation at target and the objective of stabilising growth in output and employment. It was the Executive Board's assessment that the sight deposit rate should lie in the interval 1¾ - 2¾ per cent in the period to the publication of the next Inflation Report on 2 November. New information since the previous monetary policy meeting does not provide grounds for deviating from the interest rate path envisaged in the June Inflation Report.

Outlook and risk factors

The analyses in the June Inflation Report showed that capacity utilisation in the Norwegian economy is expected to increase this year and next, and to exceed its normal level. There are prospects that inflation will gradually pick up and be close to 2½ per cent three years ahead. Monetary policy that gradually becomes less expansionary will over time stabilise the economy, thereby curbing inflation and preventing it from overshooting the target. New information since the previous Inflation Report does not provide grounds for changing the assessment of developments in the real economy. Nor has there been any substantial change in the inflation outlook.

The June Inflation Report pointed to the risk that a low interest rate over a long period may gradually result in stronger pressures in the economy than indicated in the baseline scenario. The Report also pointed to the possibility that the price-curbing effects of increased imports from low-cost countries in Asia and Central and Eastern Europe may continue to restrain inflation. Increased inward labour migration and tighter labour market competition may curb wage growth. So far, there is no basis for altering the assessment of these uncertain factors.

Economic developments

The Executive Board also places particular emphasis on the following new information that has emerged since the previous monetary policy meeting on 30 June:

• Growth in the US seems to have remained solid in the second quarter. In the euro area, optimism is somewhat higher in manufacturing, while consumer confidence has fallen. In Japan, activity seems to have picked up somewhat in the second quarter after strong growth in the first quarter. Growth in the UK seems to be slightly weaker than previously expected. In Sweden, growth picked up in the second quarter after weak developments in the first quarter. Growth among trading partners seems on the whole to be approximately as expected in the June Inflation Report. Consumer prices abroad are also moving broadly in line with expectations.
• On 21 July, China abandoned its fixed exchange rate against the US dollar in favour of a managed float of the Chinese renminbi against a basket of currencies. The renminbi was also revalued by a good 2 per cent. Long-term interest rates abroad have increased partly because China removed its currency's peg to the US dollar.
• Since the previous monetary policy meeting, the US key rate has been raised by 0.5 percentage point. Market participants expect that the Federal Reserve will continue to increase the interest rate. The Bank of England has lowered its key rate by 0.25 percentage point. Interest rate expectations in Sweden and the euro area have picked up. It is now expected that interest rates will be kept unchanged ahead.
• The price of oil remains high and is now more than USD 60 per barrel. Oil futures prices 6-7 years ahead have also risen since the publication of the June Inflation Report, and are now at more than USD 60 per barrel. High oil prices contribute to higher earnings for oil companies and the state, but the increase is to some extent being offset by some decline in oil production on the Norwegian continental shelf.
• Consumer prices adjusted for tax changes and excluding energy products (CPI-ATE) fell by 0.3 per cent from June to July. Prices for imported consumer goods fell more than expected in July. The year-on-year rise in the CPI-ATE was 1.1 per cent in July, unchanged since June. Adjusted for the interest rate's direct effect on house rents, the year-on-year rise in the CPI-ATE is estimated at 1.3 per cent in July. So far, price figures do not provide grounds for changing our assessment of inflation developments ahead.
• Measured by the import-weighted exchange rate, the krone has appreciated by close to 1 per cent since the previous monetary policy meeting.
• Financial market participants expect a gradual rise in Norges Bank's key rate in the period ahead. Interest rate expectations are approximately unchanged since the previous monetary policy meeting.
• Directorate of Labour figures show that seasonally-adjusted unemployment stood at 3.5 per cent in July. The rate has remained unchanged since April. Statistics Norway's Labour Force Survey (LFS) presents a somewhat weaker picture. Statistics Norway points out that this may to a certain extent be due to differences in definition, shortcomings in seasonal adjustment and sampling uncertainty associated with the LFS figures.
• Household demand appears to remain high, as projected in the previous Inflation Report. Goods consumption picked up from May to June.
• Household credit growth has moved up. House prices have continued to rise. Housing starts are high.
• According to Statistics Norway's business tendency survey, industrial leaders still regard the outlook for manufacturing as positive, and an increasing number are considering an upward revision of approved investment plans. Profitability is solid in many enterprises, and equity prices on the Oslo Stock Exchange have continued to rise. The rate of growth in overall debt for mainland enterprises has moderated somewhat. Corporate liquidity in the form of bank deposits has increased by 11.7 per cent over the past twelve months to end-June.

Charts - monetary policy meeting (PPT, 598 kB)
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