New information since Inflation Report 3/06 was published in November indicates that growth in the economy may be somewhat higher than projected. A steadily rising number of enterprises are facing labour shortages. Wage growth now appears to be rising at a somewhat faster rate than expected. The rate of increase in house prices and debt growth remains high. Moreover, underlying inflation has been somewhat higher than projected in the Inflation Report, and is now estimated to lie in a range of a little less than 1¼ per cent and up to 1¾ per cent. The risk of an imminent and pronounced slowdown in the world economy is now judged to be somewhat smaller than earlier.

Monetary policy influences the economy with a lag. Even though the interest rate has been increased considerably since summer 2005, it is still 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 prevailing monetary policy strategy, 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. The interest rate was raised in November and December. The Executive Board considered the alternative of leaving the interest rate unchanged. On balance, however, new information indicated that the key policy rate should be raised at the present 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. Inflation was projected to remain low to the end of 2006 and into 2007, but inflation was expected to pick up in particular from the latter half of 2007 and into 2008 as a result of high capacity utilisation, rising wage growth and somewhat slower productivity growth.

In the Report, it was pointed out that pronounced shifts in the import pattern, a strong krone and intensified domestic competition may lead to lower-than-projected inflation. It was also pointed out that a long period of low real interest rates may result in higher growth in output and employment and higher-than projected price and cost inflation.

The strong figures for growth and employment may tilt towards a faster-than-projected rate of increase in prices and wages. New information since the publication of the previous Inflation Report may suggest that the risk that inflation will be considerably lower than projected in the period ahead has subsided somewhat.

Economic developments

The Executive Board has placed emphasis on the following new information, which has emerged since the previous monetary policy meeting on 13 December:

• Growth in the world economy has been somewhat stronger than projected in Inflation Report 3/06. In the US, the euro area, the UK and Sweden, growth has slackened less than expected. Activity in many Asian countries appears to remain buoyant. Some indicators point to weaker growth in Japan.
• Brent Blend spot prices have declined markedly, from USD 62 to USD 55 per barrel. Futures prices for delivery at end-2008 are now at USD 59 per barrel, i.e. a decline of USD 9. Prices for metal commodities have also fallen. 
• The fall in energy prices through autumn has pushed down consumer price inflation in many countries. Core inflation is low. In the UK, inflation has edged up.
• International stock markets have advanced. The benchmark index on the Oslo Stock Exchange has increased by about 9 per cent.
• Both short-term and long-term interest rates have risen among our trading partners. Interest rate expectations have increased somewhat more in Norway than abroad, particularly about one year ahead. Policy rates in Switzerland, Sweden, Iceland and the UK have been raised by 0.25 percentage point. In the period to autumn 2007, policy rates are expected to be raised further in several countries. In the US, the tightening cycle appears to have come to an end and the market expects an interest rate reduction in the course of 2007.
• The import-weighted krone exchange rate (I-44) has depreciated by near 3 per cent and is now close to the projection in the Inflation Report.
• The year-on-year rise in consumer prices was 2.2 per cent in December, 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 1.0 per cent in December, and 1.2 per cent when further adjusted for lower maximum day-care rates. By this measure, inflation has increased by 0.2 percentage point since November. The rate of increase in prices measured by a trimmed mean of sub-indices in the consumer price index was 1.6 per cent in December. As measured by the weighted median, the rate of increase was 1.9 per cent.
• According to Statistics Norway’s external trade statistics for the fourth quarter of 2006, import prices have increased, particularly for commodities, but also for intermediate and consumer goods. The rate of increase in export prices, excluding oil and gas, is still very high. The volume of traditional goods exports increased by a seasonally adjusted 2.7 per cent on the previous quarter, while the volume of imports increased by 6.1 per cent.
• In manufacturing, production growth is strong, particularly for intermediate and investment goods. The rate of debt accumulation in the enterprise sector is rising, and enterprises are rapidly accumulating liquid assets.
• Registered unemployment adjusted for seasonal variations remained unchanged at 2.2 per cent of the labour force in December. Seasonally adjusted unemployment, as measured by Statistics Norway’s labour force survey (LFS), has shown a further fall. In the period between September and November 2006, the unemployment rate was 3.1 per cent. Employment has exhibited a marked increase. Between July and October, the number employed increased by 24 000. 
• Household spending on goods continued to rise in November, with twelve-month growth at 5.8 per cent. Activity remains firm in the housing market. According to Statistics Norway’s building statistics, housing starts increased by 2.3 per cent in the period between January and November 2006, compared with the same period one year earlier. Housing construction costs rose by 5.5 per cent in the year to December 2006. According to real estate agency statistics, house prices increased by 18.6 per cent in the same period. Growth in household borrowing remains high.

Charts - monetary policy meeting (151kb)