Underlying inflation has picked up, but is lower than the inflation target. Various measures of underlying inflation are now between 1½% and 2%. Growth in the Norwegian economy remains strong and stronger than projected earlier. Capacity utilisation is high. Wage growth is on the rise and there are prospects of higher inflation.

At the same time, the krone has appreciated markedly and there are prospects that somewhat weaker growth in the world economy will contribute to curbing inflation and growth in output and employment in Norway. Moreover, money market rates have risen more than market expectations concerning the key policy rate would imply in the short term.

The analysis in this Report implies that the key policy rate should be increased further, but to a lesser extent than envisaged in June. A higher interest rate will gradually reduce capacity utilisation so that inflation will not become too high. The Executive Board’s strategy is that the key policy rate should be in the interval 4¾ – 5¾% in the period to the publication of the next Monetary Policy Report on 13 March 2008, unless the Norwegian economy is exposed to major shocks. Given the inflation target, we will be mindful of the effects of higher interest rates on the krone exchange rate when inflation is low.

The projections are uncertain. 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, high capacity utilisation and higher cost inflation may lead to higher-than-projected inflation. On the other hand, the risk of slower growth in the world economy has increased. If growth in the world economy turns out to be weaker or the krone stronger than projected, inflation may be lower than projected in this Report.

Economic developments

The Executive Board has placed emphasis on the following new information since the previous monetary policy meeting on 26 September:

• Growth in the US economy has slackened and there are signs of somewhat slower growth in western Europe. Growth is strong in emerging economies, particularly China, India and Russia.
• Turbulence in international money and credit markets has persisted. Many central banks have continued to provide an ample supply of liquidity into money markets. In Norway, interest rates on loans with maturities longer than one week also remain substantially higher than market expectations concerning the key policy rate. It appears that banks’ lending rates this autumn have been raised more than the key rate.
• Market expectations as to central banks’ key rates have been lowered in Norway and abroad. The central bank in Sweden has raised its key rate by 0.25 percentage point. Equity prices are generally somewhat higher than at end-September.
• The spot price of Brent Blend oil is now about USD 89 per barrel, an increase of USD 11 since the previous monetary policy meeting. The increase is lower measured in other currencies. A weighted average of Statoil and Hydro’s selling price for gas showed a slight rise from the second to the third quarter. Total petroleum production on the Norwegian continental shelf fell by about 6 per cent in the period January to August compared with the same period a year earlier.
• After a substantial appreciation of the krone exchange rate through summer, the import-weighted krone exchange rate appreciated further by about 0.3 per cent.
• Owing to the decline in electricity prices, overall inflation is low. The year-on-year change in the consumer price index (CPI) was -0.3 per cent in September. Adjusted for tax changes and excluding energy products, consumer prices (CPI-ATE) rose by 1.6 per cent over the past twelve months, down from 1.8 per cent in August. The rise in prices measured by a trimmed mean of the rise in the sub-indices in the CPI was 1.6 per cent in September, while a weighted median showed a rise of 1.8 per cent.
• According to External Trade Statistics, prices for traditional export goods fell by 1.7 per cent in the year to the third quarter. Import prices for goods, excluding energy products, rose by 3.4 per cent in the same period.
• In September, seasonally adjusted registered unemployment stood at 1.8 per cent of the labour force, about the same as in the previous month. As measured by Statistics Norway’s labour force survey (LFS), seasonally adjusted unemployment was 2.5 per cent in July (three-month period June-August). Employment increased by 7 000 between June and July, while the labour force expanded by 8 000 in the same period.
• Manufacturing production increased by a seasonally adjusted 0.3 per cent in the period June-August compared with the previous three-month period. Statistics Norway’s business tendency survey for manufacturing showed a continued rise in production volume, order backlogs and employment in the third quarter.
• Gross domestic debt in the enterprise sector was 21.1 per cent higher in August than at the same time last year. Enterprises’ liquid assets rose by 26.7 per cent in the same period. Commercial property starts in square metres rose by 22 per cent in the first eight months of this year compared with the same period one year earlier.
• According to the financial accounts, household net lending was a negative NOK 79.0 billion over the four quarters to the second quarter of this year. Household net financial assets nonetheless rose by NOK 59.3 billion in the same period as a result of securities gains and changes in the basis of measurement for securities. Twelve-month growth in household gross domestic debt was 12.0 per cent at the end of August. Household spending on goods rose by 7.7 per cent in the year to August 2007.
• House price statistics from the real estate industry show that the seasonally adjusted monthly rise in house prices slowed for the third consecutive month in September. The twelve-month rise was 7.6 per cent in September, down from 9.2 per cent in August. The number of housing starts is lower than earlier this year. According to the consultancy firm ECON Pöyry, both the turnover rate and the numbers of new dwellings sold in south-eastern Norway were lower in September and October than in the previous two-month period.