There are prospects that consumer price inflation will pick up and approach the target as from 2008, but the projections are uncertain. Inflation, wage growth and capacity utilisation are broadly in line with the projections in the previous Report. A fall in energy prices has pushed down CPI inflation. Underlying inflation has been relatively low in recent months in line with expectations and is estimated to be between 1 and 1½ per cent. However, there are several factors that point to higher inflation ahead. Growth in the Norwegian economy is strong and the high level of activity may hold up somewhat longer than expected earlier. Employment is rising faster than projected and unemployment has declined to a low level.

The interest rate path presented in Monetary Policy Report 1/07 reflects the Executive Board’s trade-off between bringing inflation up to target and stabilising developments in output and employment. In the light of this trade-off, the interest rate will be increased gradually so that we can assess the effects of interest rate changes and other new information on economic developments.

The key policy rate was most recently increased in January. The strategy in Monetary Policy Report 1/07 is that the sight deposit rate should lie in the interval 4-5 per cent in the period to the publication of the next Report on 27 June, conditional on economic developments that are broadly in line with projections. The Executive Board considered the alternative of leaving the interest rate unchanged at today’s meeting, but decided that it was appropriate to increase the interest rate.

Outlook and risk factors

CPI inflation is expected to fall markedly through spring and remain low in the period to autumn. Low consumer price inflation primarily reflects the fall in electricity prices from high levels in 2006. As the effect of lower electricity prices unwinds and cost inflation picks up, inflation is likely to move up. CPI inflation adjusted for tax changes and excluding energy products, is projected to show a more gradual rise. Capacity utilisation in the Norwegian economy is expected to remain high through 2007. The boom in the Norwegian economy is expected to continue, but to moderate in the period to 2010.

Growth among our trading partners has been stronger than expected in the previous Report, but the recent fall in equity prices and financial market turbulence have generated uncertainty concerning future economic developments. So far, the weakening of the US housing market has not had pronounced negative spillover effects. Growth in China and India is strong and the euro area is experiencing a broad-based upturn. Global growth is probably less dependent on US demand for goods and services than was the case earlier. Nevertheless, there is a risk that imbalances in payment flows between major economies may have a substantial adverse impact on global growth and result in exchange rate volatility and higher risk premia in financial markets.

New information may reveal aspects of economic developments that indicate that the Norwegian economy is moving on a different path than projected. On the one hand, stronger shifts in trade patterns, weaker global growth, intensified domestic competition, persistently higher productivity growth or a stronger krone exchange rate may curb inflation. On the other hand, capacity utilisation, production and employment have picked up markedly over the past year, and as a result price and cost inflation may pick up more quickly than projected.

Economic developments

The Executive Board has placed emphasis on the following new information since the previous monetary policy meeting on 24 January:

• Global growth remains firm. In the US, the weakening of the housing market has so far had little negative impact on the US economy and the rest of the world.
• Volatility in global financial markets increased at the end of February and risk premia have increased somewhat. Unrest in the Chinese stock market and higher losses in some US mortgage market segments were probably the main triggering factors.
• Oil prices have edged up, but are still considerably lower than in summer 2006. Futures prices for oil deliveries at end-2008 are now USD 66, compared with USD 59 around the previous monetary policy meeting in January.
• The European Central Bank and the central banks in Japan, New Zealand and Sweden have raised their policy rates by 0.25 percentage point.
• Interest rate hikes are expected in several other countries in the period to autumn 2007. On the whole, both short-term and long-term interest rate expectations have nevertheless edged down among our trading partners. In the US, market participants are expecting a decrease in interest rates in the latter half of 2007. In Norway, interest rate expectations have been raised, particularly one year ahead.
• The import-weighted krone exchange rate has appreciated by about 2.5 per cent.
• The 12-month rise in consumer price inflation was 0.8 per cent in February, i.e. a deceleration of 0.4 percentage point on the previous month. Adjusted for tax changes and excluding energy products, consumer price inflation (CPI-ATE) was 1.1 per cent in February. As measured by a trimmed mean of the rise in the sub-indices in the consumer price index, the rise in prices slowed to 1.1 per cent in February. As measured by a weighted median, the rise in prices was 1.7 per cent.
• Annual wage growth was 4.1 per cent in 2006, according to the Technical Reporting Committee on Income Settlements.
• Seasonally adjusted unemployment, as measured by Statistics Norway’s Labour Force Survey (LFS), fell to 2.8 per cent of the labour force in the period between November 2006 and January 2007. In the same period, the number employed rose by 22 000. Seasonally adjusted registered unemployment remained unchanged at 2.1 per cent of the labour force in February.
• Preliminary quarterly national accounts figures for 2006 and revised figures for 2005 indicate that GDP growth was stronger over the past two years than previously envisaged.
• Production growth in manufacturing is strong for all groups of goods. Debt accumulation in the enterprise sector is increasing sharply and enterprises’ liquid assets are substantial.
• Information from Norges Bank’s regional network shows solid growth in demand and production. Growth picked up towards the end of 2006 and has remained stable into 2007. Petroleum-related enterprises have shown the strongest growth, but growth in manufacturing and services is also vigorous. Market prospects for the next six months are positive, even though enterprises as a whole expect growth to slow somewhat. Capacity constraints are an important factor behind expectations of slower growth. Wage growth is now expected to be markedly higher than at the beginning of 2006, particularly in manufacturing and retail trade.
• Household spending on goods rose by a seasonally adjusted 2.7 per cent between December 2006 and January 2007. The increase over the past two months primarily reflects a sharp rise in the number of new car registrations, which must be seen in connection with the changes in car taxes introduced at the beginning of the year. Statistics from the real estate industry show that house prices were 18.6 per cent higher in February 2007 than in February 2006, down from 19.5 per cent in January. House price statistics from the Oslo Housing and Savings Society also show that the year-on-year rise slowed between January and February. TNS Gallup's trend indicator shows increased household optimism. Household debt accumulation remains high.

Charts - monetary policy meeting (770 kB)
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Charts - monetary policy meeting (136 kB)