Economic developments

The Executive Board has placed emphasis on the following information since the previous monetary policy meeting on 11 August:

• In Asia and among some of Norway’s main trading partners, such as Germany and Sweden, activity has increased more than expected. The growth prospects for the US have been lowered. Unemployment remains high in most advanced economies.
• Underlying consumer price inflation is low in many advanced economies. Market participants’ inflation expectations have fallen in the US and Europe.
• Central bank key interest rates have been raised by 0.25 percentage point in Sweden and Canada. In the US, the expected interest rate increase has been pushed further ahead. An interest rate increase in the UK is expected before summer next year. At the same time, short-term market rates in the euro area are expected to rise over the same period. On the whole, expected future key rates among Norway’s trading partners are lower than at the time of the publication of the most recent Monetary Policy Report in June.
• There have been considerable movements in long-term interest rates in Norway and abroad since the most recent Monetary Policy Report. Overall, long-term rates have fallen markedly in the US, the UK and the euro area, while declining somewhat in Norway.
• The differential between Greek and German long-term government bond yields has widened by 1.2 percentage points to 9.1 percentage points. In Portugal and Ireland, differentials have also increased and are now 3.9 and 4 percentage points, respectively.
• The Basel Committee has agreed on proposals for new minimum capital requirements for banks. The requirements will apply from 1 January 2013 with various transition arrangements up to 2019.
• The premium on three-month money market rates in Norway remains somewhat higher than 0.6 percentage point. So far in the third quarter, the premium has been slightly higher than assumed in the most recent Monetary Policy Report.
• According to figures from Norsk familieøkonomi, weighted residential mortgage lending rates (1) are approximately unchanged.
• Equity prices have shown wide fluctuations. Leading international stock indices, including the Oslo Børs benchmark index, have gained close to 7 per cent.
• The Economist commodity-price index has increased by 5 per cent in XDR terms (2). The spot price of Brent Blend oil has fallen by 2 per cent.
• So far in the third quarter, the import-weighted krone exchange rate (I-44) has on average been in line with that projected in the most recent Monetary Policy Report.
• The interest rate differential against trading partners is approximately unchanged at 1.8 percentage points.
• In the year to August 2010, the consumer price index (CPI) rose by 1.9 per cent. Adjusted for tax changes and excluding temporary changes in energy prices (CPIXE), consumer prices rose by 1.6 per cent. Other indicators of underlying inflation ranged between 1.4 and 2.8 per cent. Consumer price inflation was somewhat lower than projected in the most recent Monetary Policy Report. According to Perduco’s expectations survey, long-term inflation expectations edged down in the third quarter.
• Registered unemployment was a seasonally adjusted 2.8 per cent of the labour force in August, approximately unchanged on the most recent month. This is somewhat lower than projected in the most recent Monetary Policy Report. According to Statistics Norway’s labour force survey (LFS), employment rose from May to June. 
• Preliminary seasonally adjusted figures from the quarterly national accounts show that mainland GDP grew by 0.5 per cent from the first to the second quarter of 2010. Total household consumption fell by 0.6 per cent and mainland investment rose by 7.3 per cent. Overall growth was approximately as projected in the most recent Monetary Policy Report.
• Household spending on goods rose by a seasonally adjusted 0.7 per cent from June to July. According to various confidence indicators, household expectations seem to be more positive.
• Twelve-month growth in gross domestic debt in the private and municipal sector (C2) was 4.7 per cent in July. Debt growth for non-financial corporations increased by 0.6 per cent, up from 0.5 per cent in June. Household debt growth slowed from 6.2 per cent in June to 6.1 per cent in July.
• According to house price statistics from the real estate industry, house prices rose by a seasonally adjusted 0.2 per cent from July to August. In the year to August 2010, house prices rose by 6.1 per cent.
• Seasonally adjusted manufacturing output was 1.2 per cent higher in the period from May to July than in the three-month period to April.
• According to order statistics, the value of new building and construction orders increased by 4.8 per cent from the first to the second quarter of 2010, adjusted for seasonal variations (3). The value of new manufacturing orders increased by 23 per cent in the same period.
• According to Statistics Norway’s third-quarter investment intentions survey, the value of investment in manufacturing, mining and electricity supply is estimated to be 8 per cent higher in 2011 than the estimate for 2010 published at the same time last year. The value of petroleum sector investment in 2011 is estimated to be 2 per cent higher than the estimate for 2010 published at the same time last year.

Assessment
The global economy is recovering, but unemployment is still high and capacity utilisation low in many advanced economies. Activity in several European countries increased more than expected in the first half of the year. Growth remains high in Asia. Growth prospects in the US have been lowered. Slightly slower growth is also likely in the euro area ahead. Commodity prices have risen markedly in recent months, but consumer price inflation remains low in most advanced economies and inflation expectations have edged down. Financial markets have stabilised somewhat after the turbulence before summer, but are still marked by uncertainty. Key rate expectations for trading partners are on the whole somewhat lower than in June.

In Norway, consumer price inflation has slowed to a slightly lower rate than expected. Underlying inflation is somewhat below 2 per cent and new information may indicate that inflation in the coming months will be slightly lower than projected in June. On the other hand, overall activity in the Norwegian economy seems to be expanding approximately in line with the projections in the most recent Monetary Policy Report. Developments in private consumption are somewhat weaker than expected, but corporate investment seems to be rising. Employment appears to be increasing and unemployment has been somewhat lower than projected, but capacity utilisation is probably still below a normal level. Both the consideration of keeping consumer price inflation close to 2.5 per cent and the consideration of stabilising developments in output and employment imply a low interest rate. Expectations that interest rates in other countries will remain low for a prolonged period point in the same direction.

The low interest rate level has not triggered an increase in household debt growth so far and the rise in house prices is moderate. The consideration of guarding against the risk of future financial imbalances that may disturb activity and inflation somewhat further ahead nonetheless suggests that the interest rate should be gradually brought closer to a more normal level.
 
The Executive Board’s strategy is that the key policy rate should be in the interval 1½–2½ per cent in the period to the publication of the next Monetary Policy Report on 27 October unless the Norwegian economy is exposed to new major shocks. An overall assessment of the outlook and the balance of risks suggest that the key policy rate be left unchanged at this meeting.

Decision:
The key policy rate is left unchanged at 2 per cent.

Footnotes

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

2) Special drawing rights, IMF. As of 20 September, XDR 1 = NOK 9.28

3) Norges Bank’s adjustment for seasonal variations