Meeting 19 June 2019

Norges Bank's Executive Board has decided to raise the policy rate by 0.25 percentage point to 1.25%. The Executive Board's current assessment of the outlook and balance of risks suggests that the policy rate will most likely be increased further in the course of 2019.

Growth among Norway's trading partners slowed after having been on the rise for several years. So far in 2019, growth has been a little higher than expected, but the growth outlook has weakened somewhat since the March 2019 Monetary Policy Report. The UK's relations with the EU are yet to be clarified, and trade tensions between the US and China have deepened. This has led to a broad-based fall in foreign interest rates. Both oil spot and futures prices have fallen and are somewhat lower than in March. Higher capacity utilisation has contributed to a pick-up in wage growth among trading partners over the past year. Price and wage inflation are expected to move up slightly ahead, broadly as projected in the March Report.

The upswing in the Norwegian economy has continued since autumn 2016. Employment has risen, and unemployment has fallen. There are prospects that the upswing will continue into 2020, owing in part to higher activity in oil services. Further out, a decline in investment on the Norwegian shelf is likely to dampen growth.

Growth in the mainland economy was somewhat lower than expected in 2019 Q1, weighed down by lower production in the power sector and fisheries. The enterprises in Norges Bank's Regional Network report solid growth and expect growth to remain firm ahead. Employment has risen more than expected. Unemployment has fallen a little, broadly as projected in the March Report.

Consumer price inflation picked up through 2018, in part reflecting a rise in electricity prices. So far in 2019, consumer price inflation has edged down. Underlying inflation also picked up in 2018, partly reflecting higher wage growth.

Since the March Report, inflation has been broadly as projected. The 12-month rise in the consumer price index (CPI) was 2.5% in May. Adjusted for tax changes and excluding energy products (CPI-ATE), inflation was 2.3%. The spring wage settlement indicates a pick-up in wage growth in 2019 in line with the projection in the March Report. Tighter labour market conditions suggest a further rise in wage growth, but lower oil prices and continued weak profitability in some business sectors will likely dampen the rise. The krone is weaker than expected.

Persistently high debt growth has increased household vulnerability. Household debt growth has abated somewhat in recent years, but remains higher than growth in disposable income. House price inflation has been low recently.

In its discussion of the risk outlook, the Executive Board focused in particular on global developments. If trade tensions deepen further, growth among trading partners and oil prices may be lower than projected. This may weigh on domestic growth. At the same time, the krone may remain weak, if uncertainty persists. The Executive Board also noted that the upswing in the oil industry and spillovers into the Norwegian economy may prove to be stronger than envisaged.

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.

In its assessment, the Executive Board notes that the monetary stance remains accommodative. Growth in the Norwegian economy is solid, and capacity utilisation is estimated to be somewhat above a normal level. Underlying inflation is a little higher than the inflation target. At the same time, trade tensions are a source of substantial global uncertainty. Uncertainty surrounding the effects of monetary policy suggests a cautious approach to interest rate setting. The overall outlook and balance of risk suggest that the policy rate be increased somewhat further.

The upturn in the Norwegian economy appears to be a little stronger the coming year than projected earlier. On the other hand, there are prospects for weaker external growth and lower foreign interest rates. The policy rate forecast indicates a slightly faster rate rise in the coming year than projected in the March Report, but the policy rate path is little changed further out. With a policy rate in line with the forecast, inflation is projected to remain close to the inflation target in the years ahead, at the same time as unemployment remains low. The policy rate path will be adjusted in response to a change in economic prospects.

The Executive Board decided to raise the policy rate by 0.25 percentage point to 1.25%. The Executive Board's current assessment of the outlook and balance of risks suggests that the policy rate will most likely be increased further in the course of 2019. The decision was unanimous.

Norges Bank's press release is published shortly after the press release from the Ministry of Finance is public.

• Press release about countercyclical buffer at government.no
• Norges Bank's advice on the countercyclical buffer 2019 Q2 in a letter to the Ministry of Finance
• The decision basis for Norges Bank's advice is presented in Section 6 of the June 2019 Monetary Policy Report and Indicators of financial imbalances