Meeting 18 December 2019

Norges Bank’s Executive Board has decided to keep the policy rate unchanged at 1.50%. The Executive Board’s current assessment of the outlook and balance of risks suggests that the policy rate will most likely remain at this level in the coming period.

GDP growth among Norway’s trading partners slowed through 2018 and has been moderate in 2019. Since the September 2019 Monetary Policy Report, trading partner growth has been a little higher than expected, but the outlook ahead is little changed. Unemployment is low in many countries, but employment growth has recently fallen somewhat. It now appears that the UK will leave the EU in the new year with a withdrawal agreement. The US and China have reached a limited trade agreement. Since the September Report, trading partner forward rates have edged up. Oil prices have also risen.

Since 2016, growth in the Norwegian economy has been solid. Employment has risen, and unemployment has fallen. The upswing in the mainland economy has continued in 2019. Looking ahead, there are prospects that large investment projects on the continental shelf will be completed. This will dampen growth in the Norwegian economy.

Growth in the mainland economy slowed in autumn and has been a little lower than expected. The enterprises in Norges Bank’s Regional Network expect a further slight decline over the next half-year. Unemployment has been stable and in line with the projections in the September Report, but employment rose somewhat less than expected in Q3. Overall, labour market developments have been slightly weaker than projected, and capacity utilisation appears to be a little lower than previously assumed.

Consumer price inflation has moderated in 2019, after having picked up markedly through 2018. Lower electricity price inflation in particular has restrained the general rise in prices. Underlying inflation has also moderated and has been fairly stable at close to 2% since summer.

Since the September Report, inflation has been broadly in line with that projected. The 12-month rise in the consumer price index (CPI) was 1.6% in November. Adjusted for tax changes and excluding energy products (CPI-ATE), inflation was 2.0%. Tighter labour market conditions in recent years have pushed up wage growth. Social partners’ wage expectations suggest that wage growth will be moderate ahead.

The krone has depreciated considerably and is weaker than projected in September. A weaker krone will lift imported goods inflation. The krone depreciation also improves Norwegian firms’ cost-competitiveness and may pull up demand for Norwegian goods and services.

Financial imbalances are no longer building up, and there are now some signs that they are receding. Household debt growth has abated over the past few years, and house price inflation has been moderate. Since the September Report, house price inflation and household debt growth have been a little lower than expected.

In its discussion of the risk outlook, the Executive Board focused on trade tensions, which continue to be a source of uncertainty about global developments. Foreign interest rates are very low. The krone has depreciated considerably, and the impact of the depreciation on price and wage inflation is uncertain. The Norwegian economy seems to be near a cyclical peak. The upswing may continue longer than assumed if investment growth remains elevated longer. On the other hand, growth may prove lower than projected if, for example, trade tensions deepen and oil prices fall.

The operational target of monetary policy is annual consumer price inflation of close to 2% over time. Inflation targeting shall be forward-looking and flexible, so that it can contribute to high and stable output and employment and to countering the build-up of financial imbalances.

Since September 2018, the policy rate has been raised gradually. The monetary stance has become less expansionary. Inflation is close to the inflation target, and capacity utilisation is somewhat above a normal level. The krone depreciation will likely push up inflation somewhat, while it seems that wage growth will remain moderate ahead. Growth in the mainland economy is slowing. With a policy rate close to the current level, there are prospects that inflation will remain close to the inflation target, and that capacity utilisation will decline towards a normal level.

In the Executive Board’s assessment, the overall outlook and balance of risks suggest a policy rate at close to the current level ahead. The policy rate forecast is broadly unchanged from the September Report. A weaker-than-projected krone implies in isolation a higher policy rate path. On the other hand, the upturn in the Norwegian economy appears to be a little more moderate than previously assumed. In isolation, this suggests a slightly lower rate path. Should the economic outlook or balance of risks change, interest rate developments may also differ from the forecast.

The Executive Board decided to keep the policy rate unchanged at 1.50%. The Executive Board’s current assessment of the outlook and balance of risks suggests that the policy rate will most likely remain at this level in the coming period. The decision was unanimous.

Øystein Olsen
18 December 2019