New information since the beginning of November has been broadly in line with the projections in Inflation Report 3/06. Employment is rising rapidly and unemployment has fallen markedly. A steadily rising number of enterprises are facing labour shortages. Wage growth appears to be on the rise. Underlying inflation has been somewhat higher than expected over the past three months and is now estimated to lie in the interval 1-1¾ per cent. The krone exchange rate is somewhat stronger than assumed.

Monetary policy influences the economy with a lag. Over several years, interest rates have been considerably lower than what we consider to be a neutral level. The interest rate may gradually be raised to a more normal level, although it is unlikely that rates will be raised at every monetary policy meeting. The interest rate will thus continue to be raised in small, not too frequent steps.

According to the monetary policy strategy in Inflation Report 3/06, the sight deposit rate should be in the interval 3¼ - 4¼ per cent in the period to the publication of the next Inflation Report on 15 March, conditional on economic developments that are broadly in line with projections. On balance, the strategy in Inflation Report 3/06 and new information point to an interest rate increase at this meeting.

Outlook and risk factors

The analyses in Inflation Report 3/06 suggest that the interest rate may gradually be raised to a more normal level, although it is unlikely that rates will be raised at every monetary policy meeting. In the report, growth in the world economy is expected to hold up even with slower growth in the US. In Norway, capacity utilisation is projected to increase further. A continued moderate rise in labour costs this year, strong competition in product markets, high productivity growth and an increase in the share of imports from low-cost countries will probably contribute to keeping consumer price inflation at a low level through the remainder of this year and into next year. Against the background of high capacity utilisation, rising wage growth and somewhat lower productivity growth, inflation is expected to pick up in Norway, in particular from the latter half of 2007 and into 2008.

In the previous Inflation Report, it was pointed out that on the one hand pronounced trade shifts, increased competition, weaker global growth or a strong krone may result in low inflation. The low level of real interest rates prevailing in recent years or a depreciation of the krone may on the other hand lead to higher-than-projected growth in output and inflation.

Economic developments

The Executive Board has placed emphasis on the following new information, which has emerged since the previous monetary policy meeting on 1 November:

• Developments in the world economy have been broadly in line with the projections in the latest Inflation Report. There are prospects that economic growth will slow in the US, but that growth will hold up in Europe and Asia. On the whole, global equity prices have shown little change since the strong gains observed earlier in autumn.
• Brent Blend spot prices have risen to a little less than USD 65 per barrel, but are still lower than in summer. Futures prices for delivery at end-2008 remain unchanged just below USD 68 per barrel. Other commodity prices have edged up.
• The fall in energy prices through autumn has pushed down consumer price inflation in many countries. Core inflation has been more stable and remains moderate in most countries. In the US, core inflation fell in October, after rising for a longer period.
• Since the previous monetary policy meeting, policy rates have been raised by 0.25 percentage point in the euro area, the UK and Australia. Interest rate expectations 12 months ahead remain virtually unchanged in the euro area, US and UK. In Sweden, there are expectations of a slightly faster increase in interest rates. In the year ahead, market participants expect an increase in policy rates in the euro area, Sweden, Switzerland and Japan. In the same period, policy rates are expected to be lowered in the US and Canada. International bond yields with long maturities are low and have shown little change.
• In Norway, money market rates are now expected to rise somewhat faster than implied by market expectations prior to the publication of the previous Inflation Report. Prices in financial markets indicate that there are expectations that the key policy rate in Norway will increase by 1.25-1.50 percentage point over the next twelve months.
• The import-weighted krone exchange rate (I-44) has appreciated by a little more than 3 per cent since the previous monetary policy meeting and is now about 2¼ per cent stronger than the level that was assumed to prevail at the beginning of 2007 in the previous Inflation Report.
• The year-on-year rise in the consumer price index (CPI) was 2.6 per cent in November. The recent fall in electricity prices will probably lead to a somewhat slower rate of increase in the CPI through winter than projected in the latest Inflation Report. Various measures of underlying inflation have edged up over the past three months. In November, the year-on-year rise in the consumer price index adjusted for tax changes and excluding energy products (CPI-ATE) was 0.8 per cent, and 1.0 per cent when further adjusted for lower maximum day-care rates. The rate of increase measured by a trimmed mean of sub-indices in the consumer prices index was 1.7 per cent in November. As measured by the weighted median, the rate of increase was 2.3 per cent.
• TNS Gallup's expectations survey for the fourth quarter of 2006 point to stable inflation expectations. Economists in the financial industry and academia expect inflation to be close to the inflation target 2 and 5 years ahead.
• According to Statistics Norway's wage index, growth in disbursed wages picked up in the third quarter, particularly in retail trade and the transport industry. High bonus payments are pushing up wage growth in the financial industry. TNS Gallup's survey indicates that expectations concerning wage growth in 2006 and 2007 have increased somewhat.
• According to Statistics Norway, mainland GDP increased by 0.9 per cent in third quarter and 4.6 per cent in the first three quarters of this year compared with the same period one year earlier. Mainland GDP growth in 2005 has been revised up from 3.7 per cent to 4.1 per cent.
• Both Statistics Norway's labour force survey (LFS) and preliminary national accounts figures show strong employment growth in the third quarter. According to the LFS, the labour force showed a further increase. Unemployment still continued to fall and seasonally adjusted LFS unemployment moved down to 3.3 per cent. Adjusted for normal seasonal variations, the number of registered unemployed came to 2.2 per cent of the labour force in November.
• In manufacturing, growth in total production and new orders remains firm. According to Statistics Norway's investment intentions survey for the fourth quarter of 2006, investment plans for this year and next have been revised up somewhat in manufacturing, the power supply industry and petroleum sector. Total gross debt of mainland enterprises is still on the rise and was 16.9 per cent higher in August 2006 than in August 2005. Money growth in the enterprise sector remains high. The benchmark index on the Oslo Stock Exchange has increased.
• Household spending on goods continued to rise in October, with twelve-month growth at 5.7 per cent. TNS Gallup's trend indicator, which measures households' assessments and expectations concerning their financial situation and the Norwegian economy, is at a high level. Growth in household debt remains high. The twelve-month rate of increase in house prices edged down to 18.0 per cent in November, according to house prices statistics from the real estate industry. Housing starts are higher so far this year compared with the same period one year earlier, but new orders fell between the second and third quarter.
• Information from Norges Bank's regional network in November 2006 indicates that the Norwegian economy is still booming. Growth in manufacturing is somewhat stronger than at the time of the previous regional report in August. Enterprises expect slower growth over the next half-year as a result of capacity constraints. All industries report steadily growing difficulties in procuring skilled labour. Our contacts in the regional network have revised up their wage growth expectations for 2006 to some extent. Selling prices will rise at a faster pace in manufacturing and the building industry. The rise in prices is lower and more stable in retail trade and household services.
• The Storting (Norwegian parliament) has approved the general budget for 2007. The structural, non-oil budget deficit is estimated at NOK 71 billion, i.e. 4.6 per cent of trend GDP for mainland Norway or an increase of 0.3 percentage point on this year. Underlying nominal spending growth is estimated at 6.7 per cent, compared with 5.2 per cent this year.

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