Economic developments

The Executive Board has placed emphasis on the following information since the previous monetary policy meeting on 22 September:

• The IMF has revised down its growth forecasts for the US economy for 2010 and 2011. Growth is expected to remain vigorous in Asia and other emerging market economies. Forecasts for global economic growth for 2011 have been marginally revised down to 4.2 per cent.
• Underlying consumer price inflation is low in many advanced economies. Market participants’ inflation expectations have risen somewhat in the US, but are unchanged in Europe.
• The US dollar has depreciated. Financial market participants expect the Federal Reserve to make further large-scale purchases of US Treasury bonds ahead. The Japanese yen has appreciated.
• In the US and the UK, the expected rise in key rates has been deferred further ahead. Key rate hikes are not expected until the end of 2011 at the earliest. In the euro area, key rate expectations have edged up.
• Long-term interest rates are approximately unchanged in the US, the UK and Norway. In the euro area, long-term rates have moved up somewhat. Long-term rates remain at low levels.
• The differential between Greek and German ten-year government bond yields has narrowed markedly.
• Three-month money market rates are unchanged in the US, but have edged up in the euro area. The spread between expected key rates and three-month money market rates (the premium) has shown little change in the US, but has fallen in Europe. 
• The premium on three-month money market rates in Norway is now slightly higher than 0.5 percentage point. So far in the fourth quarter, the premium has been somewhat higher than assumed in the June Monetary Policy Report.
• According to figures from Norsk familieøkonomi, the weighted average interest rate on new residential mortgages (1) is unchanged.
• Leading international stock indices and the Oslo Børs benchmark index have gained close to 7 per cent. Equity market volatility has eased.
• The spot price of Brent Blend oil has risen by 3 per cent in US dollar terms. The Economist commodity-price index has increased by 4 per cent in XDR terms (2). 
• The three-month money market rate differential against trading partners has narrowed to approximately 1.6 percentage points. 
• The import-weighted krone exchange rate (I-44) has depreciated by 1.1 per cent. So far in the fourth quarter, the krone exchange rate has been broadly in line with that projected in the June Monetary Policy Report.
• In the year to September 2010, the consumer price index (CPI) rose by 1.7 per cent. Adjusted for tax changes and excluding temporary changes in energy prices (CPIXE), consumer prices rose by 1.2 per cent. Other indicators of underlying inflation ranged between 0.9 and 2.2 per cent. Consumer price inflation has been lower than projected in the June Monetary Policy Report.
• Registered unemployment was a seasonally adjusted 2.9 per cent of the labour force in September, somewhat lower than projected in the June Monetary Policy Report. According to Statistics Norway’s labour force survey (LFS), employment was 25 000 higher in the period between June and August than in the previous three-month period. 
• Household spending on goods fell by a seasonally adjusted 0.5 per cent from July to August, after a rise of 0.8 per cent the previous month. Overall, growth in private consumption has been lower than expected. 
• Twelve-month growth in household credit rose from 6.1 per cent in July to 6.2 per cent in August. Twelve-month growth in credit to non-financial corporations rose from 0.6 per cent in July to 1.3 per cent in August. 
• According to house price statistics from the real estate industry, house prices rose by a seasonally adjusted 1.6 per cent from August to September. The twelve-month rise was 6.8 per cent in September. In real terms, house prices are still somewhat lower than the peak level in 2007.
• According to building statistics, the number of housing starts was a seasonally adjusted 18 per cent higher in the period between June and August than in the previous three-month period. Other building starts in the same period, in terms of utility space, fell by 8 per cent. 
• In Norges Bank’s quarterly bank lending survey, banks reported broadly unchanged credit standards for households and enterprises in the third quarter of 2010. Banks expect credit standards to remain unchanged in the fourth quarter. 
• Enterprises in Norges Bank’s regional network reported in September that output had picked up in summer, but was expected to slow somewhat ahead. The network contacts reported a modest rise in employment over the past three months with a marginal increase expected ahead. Capacity utilisation has risen, but remains at a low level.
• The volume of traditional merchandise exports fell by a seasonally adjusted 0.2 per cent from the second to the third quarter. Traditional merchandise imports fell by 1.2 per cent in the same period. 
• In the National Budget for 2011, the non-oil, structural deficit for 2011 is estimated at NOK 128.1 billion. Oil revenue spending in excess of the four per cent rule is reduced from NOK 19.6 billion in 2010 to NOK 7.4 billion in 2011. Nominal growth in underlying central government expenditure is estimated at 5 per cent. The real tax level remains approximately unchanged.

Assessment

The outlook for the world economy is still shrouded in uncertainty. Growth so far this year has been higher than projected, but there are wide variations across regions. Imbalances between major economies have given rise to strains on international economic cooperation. Several countries have pursued a policy aimed at keeping down the value of their own currency. Key rates are close to zero in many countries and the expected upward shift in interest rates has been deferred further ahead. Long-term interest rates are very low. The level of activity among Norway’s trading partners will probably be below normal for several years. This will contribute to holding down inflation abroad.

Growth in the Norwegian economy is continuing at a moderate pace and now seems to have gained a firm footing. Consumer price inflation has been lower than expected and underlying inflation is projected to remain at around 1½ per cent in the period to summer 2011. In an environment of low consumer price inflation and falling prices for imported goods, there is a risk that inflation may remain below target over a longer period. This implies a low key policy rate.

On the other hand, the key policy rate in Norway has been low for a fairly long period. So far, there are no clear signs that the low interest rate level is fuelling household debt growth, but the debt level is high at the outset. The consideration of guarding against financial imbalances that may trigger abrupt and sharp falls in output and inflation somewhat further ahead suggests that the key policy rate should not be kept low for too long.

An overall assessment of the outlook and the balance of risks presented in the October Monetary Policy Report indicates that the key policy rate should be held at the current level over the coming quarters and then gradually raised towards 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 16 March 2011 unless the Norwegian economy is exposed to new major shocks. The Executive Board decided to keep the interest rate unchanged at this meeting.

Decision:

The key policy rate is kept 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 26 October, XDR 1 = NOK 9.19