Economic developments

The Executive Board has placed emphasis on the following new information that has emerged since the previous monetary policy meeting on 28 October:

• In the third quarter, activity increased in the US, Asia, the euro area and Sweden, while it continued to fall in the UK. At the same time, unemployment is high with substantial spare production capacity. The OECD projects a fall in GDP for OECD economies of 3.5 per cent in 2009 and a rise of 1.9 per cent in 2010, thus revising up its June growth projections by 0.6 percentage point in 2009 and 1.2 percentage points in 2010.
• Inflation among Norway’s trading partners is close to zero. In the euro area and China, prices are now higher than a year ago, while the level of prices continues to fall in Japan. In many countries, different indicators of underlying inflation are still in the interval 1¼ - 2 per cent.
• Market rates indicate that market participants expect central bank key rates in the US, euro area and the UK to remain unchanged in the period to summer. Key rate expectations 12 months ahead have fallen in the US and the euro area by about 25 basis points, while they remain unchanged in the UK. Australia’s central bank has raised its key rate in three steps, the first time on 6 October, by a total of 0.75 percentage point to 3.75 per cent.
• Long-term government bond yields have fallen in many countries. In the UK, Greece and Ireland, government bond yields have edged up and prices for insurance against government debt default in countries such as Greece and Ireland have risen. 
• In Norway, three-month money market rates remain approximately unchanged. Three-month money market premiums have fallen by 0.1 percentage point and have so far in the fourth quarter been somewhat lower than assumed in the October Monetary Policy Report. The interest rate differential against trading partners remains approximately unchanged at 1.5 percentage points. 
• According to Norsk familieøkonomi, mortgage lending rates have been increased by 12 of 20 banks (1) . Weighted residential mortgage lending rates have increased by 0.12 percentage point. According to Statistics Norway, average bank lending rates to households were 0.18 percentage point lower in 2009 Q3 than in Q2.  Average corporate lending rates were 0.26 percentage point lower in 2009 Q3 than in Q2.
• The import-weighted krone exchange rate index (I-44) has depreciated by 1.0 per cent. So far in the fourth quarter, the krone exchange rate has been 0.4 per cent stronger than projected in the October Monetary Policy Report. 
• The main stock indices have advanced. The Oslo Børs benchmark index has gained about 12 per cent. The turmoil sparked by the company Dubai World’s debt problems resulted in a temporary decline in international equity markets and long-term government yields. The price of credit default swaps for Dubai and for finance companies in Europe and the US showed a marked increase.
• The spot price of Brent Blend oil has decreased somewhat. In the past five trading days, the spot price has averaged USD 72 per barrel. Futures prices for 2010 have been USD 77 per barrel over the past five trading days. 
• The Economist commodity-price index has increased by 6 per cent in XDR (2) terms. In the same period, dry cargo freight rates increased by 23 per cent. 
• The year-on-year rise in the consumer price index (CPI) was 1.5 per cent in November. Adjusted for tax changes and excluding temporary changes in energy prices (CPIXE) consumer prices rose by 2.3 per cent. Adjusted for tax changes and excluding energy products (CPI-ATE), the rate of increase was 2.4 per cent. Other indicators of underlying inflation ranged between 2.5 and 2.7 per cent. Underlying inflation has been broadly as projected in the October Monetary Policy Report. 
• According to Perduco’s expectations survey for 2009 Q4, inflation expectations one year ahead have edged up. Long-term inflation expectations have fallen. 
• Seasonally adjusted registered unemployment was 2.9 per cent in November, unchanged on October and approximately as projected in the October Monetary Policy Report. According to Statistics Norway’s labour force survey (LFS), both unemployment and the labour force contracted by 2000 from August to September, after falling by 13 000 and 12 000 respectively in the previous month. The contraction in employment from July to September was somewhat more pronounced than expected in the October Monetary Policy Report.
• Preliminary seasonally adjusted figures from the quarterly national accounts show that mainland GDP grew by 0.5 per cent from 2009 Q2 to Q3, as projected in the October Report. Growth was solid in private consumption, traditional merchandise exports and public sector demand, but gross private sector investment showed a marked decline. 
• In November, the enterprises in Norges Bank’s regional network reported moderate output growth. They expect growth to continue at the same moderate pace ahead. Employment is stable and is expected to be unchanged ahead. Operating margins had declined somewhat, although to a lesser extent than in the previous rounds.
• According to preliminary seasonally adjusted figures from the quarterly national accounts, household consumption increased by 1.1 per cent from 2009 Q2 to Q3. Spending on goods showed the strongest rise. The index for household spending on goods rose by a seasonally adjusted 2.7 per cent from September to October. This is somewhat higher than assumed in the October Report. The number of new car registrations increased by 45.5 per cent in the year to November 2009. TNS Gallup’s trend indicator, which measures consumers’ perceptions of and expectations concerning their own financial situation and the country’s economy, rose from 11.6 points to 16.4 points from 2009 Q3 to Q4.
• According to seasonally adjusted preliminary figures from household income accounts, the household saving ratio excluding dividend income rose from 5.7 per cent in 2009 Q2 to 6.5 per cent in Q3. Over the past ten years, the household saving ratio excluding dividend income has averaged 0.6 per cent.
• Gross domestic debt (C2) in the private and municipal sector increased by 5.1 per cent in the 12 months to October this year. The corresponding figure for September was 5.5 per cent. Growth in credit to non-financial enterprises is still decelerating, while household credit growth picked up in October. Non-financial enterprises’ holdings of liquid assets (M2) increased by 2.5 per cent in the year to October 2009.
• According to house price statistics from the real estate industry, house prices rose by a seasonally adjusted 1.2 per cent in November. House prices have increased by 15.1 per cent since the trough in November 2008. Since the peak in June 2007, house prices have risen by 3.7 per cent. 
• According to building statistics, the number of housing starts fell by 9.6 per cent in the 12 months to October 2009. Measured by utility floor space, housing starts remained approximately unchanged. Seasonally adjusted, the number of housing starts was 1622 in October, down from 1629 in September but up from 1586 in August. The number of other building starts has risen for three consecutive months. According to order statistics for the building and construction industry, the value of new orders remained unchanged from 2009 Q2 to Q3. Seasonally adjusted, the value of new orders increased by about 9 per cent. 
• Manufacturing production fell by a seasonally adjusted 1.5 per cent from September to October after a rise of 2.1 per cent in the previous month. Manufacturing production was a seasonally adjusted 1.5 per cent higher than in 2009 Q3 than in Q2. The industrial confidence indicator in Statistics Norway’s business tendency survey rose from -7 to -5. Managers expect output and employment to fall in 2009 Q4 and new orders are expected to level off.
• According to order statistics for manufacturing, the value of new orders increased by 3 per cent from 2009 Q2 to Q3. Export orders rose, while orders in the domestic market fell. The value of order stocks decreased by 7.0 per cent in the same period. 
• According to Statistics Norway’s investment intentions survey for manufacturing, mining and electricity, estimated manufacturing investment in 2009 is 30 per cent lower than the estimates for 2008 published at the same time last year. Estimated manufacturing investment for 2010 is 22 per cent lower than in the 2009 survey. For most manufacturing sectors, estimated investment is considerably lower than in this year’s survey.
• According to the Q4 investment intentions survey for oil and gas production, investment in petroleum activities in 2009 is estimated at NOK 141.2 billion, i.e. value growth of 11 per cent compared with the estimate for 2008 published at the same time last year. Investment for 2010 is estimated at NOK 138.5 billion, which is 5 per cent lower than the estimate for 2009 published at the same time last year.

Assessment

Growth has revived in the global economy and activity is now also picking up in the US and in most European countries. Prices for oil and other commodities remain high and financial markets are functioning more efficiently. Even though growth has picked up, there are no prospects of a strong recovery.  Economic developments ahead are still uncertain, particularly in countries with large government deficits. We expect only moderate growth ahead in the US and Europe. In a number of countries, key rate expectations are still low and have edged down since the previous monetary policy meeting.

Monetary policy is oriented towards consumer price inflation of close to 2.5 per cent over time. Consumer price inflation has been as expected. Underlying inflation is close to 2.5 per cent, but will probably fall in the period to summer, partly as a result of the krone appreciation earlier this year. The krone exchange rate has now stabilised, broadly in line with projections in the October Monetary Policy Report. As a result of low productivity, higher costs in the corporate sector, growth in household demand and higher capacity utilisation, consumer price inflation will gradually move up again.

Activity in the Norwegian economy has rebounded approximately as expected. Capacity utilisation is lower than normal, but it appears that the downturn will be fairly mild. Growth in private consumption is strong and house prices are rising sharply. Export growth is picking up somewhat more rapidly than expected. Unemployment remains at a relatively low level.  On the other hand, recent investment intentions surveys indicate that corporate and petroleum investment may be somewhat lower than estimated. The enterprises in Norges Bank’s regional network expect moderate growth in output ahead.

The Executive Board’s strategy is that the key policy rate should be in the interval 1¼ - 2¼ per cent in the period to the publication of the next Monetary Policy Report on 24 March 2010 unless the Norwegian economy is exposed to new major shocks. The analyses in Monetary Policy Report 3/09 indicate that the key policy rate should thereafter be raised gradually. Higher capacity utilisation or a weaker krone may, on the one hand, result in higher-than-projected inflation. On the other hand, inflation may be lower than expected if the krone remains strong or productivity picks up rapidly. Should the krone appreciate considerably more than projected, the interest rate may be increased to a lesser extent or later than currently envisaged. 
 
Economic developments have been broadly in line with projections. The Executive Board considered the alternative of keeping the key policy rate unchanged, but interest rates are low and the October increase in the key policy rate has had a limited impact on bank lending rates. At the same time, the upturn abroad and in Norway has, as expected, gained a firmer foothold and the outlook for next year seems less uncertain. On the basis of an overall assessment, the Executive Board decided to increase the key policy rate at this monetary policy meeting.

Decision

The key policy rate is raised by 0.25 percentage point to 1.75 per cent with effect from 17 December 2009.

Footnotes

1)   New variable-rate residential mortgages of NOK 1 million, within 60% of purchase price

2)   Special drawing rights, IMF. As of 14 December XDR 1 = NOK 9.17