Growth among key trading partners has been broadly in line with that expected at the time of the publication of the March 2012 Monetary Policy Report. The level of activity in the euro area is still on the decline, reflecting fiscal tightening and tighter credit conditions. UK output is also falling. The US economy continued to show a modest improvement in the first quarter, but figures released in recent weeks indicate somewhat weaker developments. Oil prices have edged down since March, but are still high.

There has been some renewed turbulence in financial markets. Yields on Spanish and Italian government bonds have increased. Global equity indices have moved down, particularly in Europe. Central bank key rates abroad are close to zero in many countries and the expected upward shift in interest rates has been deferred further ahead. The krone depreciated immediately following the monetary policy meeting in March and has since remained fairly stable.

Money market rates in Norway fell in response to the reduction in the key policy rate in March, but still remain markedly higher than the expected key rate. Credit premiums on covered bonds and banks bonds are still at a high level. Owing to elevated bond and credit premiums, borrowers are paying a considerably higher interest rate than implied by the low key policy rate. At the same time, in April banks reported that they had increased their margins and tightened lending standards for households and enterprises in the first quarter of 2012.

Contacts in Norges Bank’s regional network report that activity growth has been somewhat higher than expected. Both employment and the labour supply are growing at a solid pace. Unemployment remains low and fairly stable. Pay settlements are so far in line with that expected in March. Households are somewhat more optimistic about future prospects. Private consumption is somewhat higher than projected and house prices are rising at a faster pace. Consumer price inflation has been broadly in line with projections and underlying inflation is estimated to range between 1 and 1½ percent.

The key policy rate is set with a view to keeping inflation close to 2.5 per cent over time. At its meeting on 14 March, the Executive Board decided that the key policy rate should be in the interval 1-2 percent until the publication of the next Monetary Policy Report on 20 June, unless the Norwegian economy is exposed to new major shocks.

Weak growth prospects in Europe and a strong krone are holding down inflation at a low level. If the key policy rate is set at a level that is too high, there is a risk that the krone will appreciate and inflation become too low. Sluggish developments abroad are restraining growth among Norwegian companies exposed to international competition. The impact on the Norwegian economy of a prolonged downturn abroad, in conjunction with very low foreign interest rates, suggest that the key policy rate should be kept at a low level. On the other hand, there are signs of improving conditions in the Norwegian economy. Capacity utilisation is close to a normal level, with vigorous activity in petroleum-related industries. Low interest rates over a long period may lead to considerable risk taking and excessive debt accumulation among households and firms. These conditions suggest that the key policy rate should further out be raised gradually to a more normal level.

In the March 2012 Monetary Policy Report, the key policy rate was projected to remain at today’s level over the coming year. There are signs that activity in the Norwegian economy is slightly higher than expected in March, but financial market tensions have flared up again.

An overall assessment of the outlook and balance of risks indicates that the key policy rate should be kept unchanged at this meeting.

Decision
The key policy rate is kept unchanged at 1.5 percent.