Meeting 18 September 2019

Norges Bank’s Executive Board has decided to raise the policy rate by 0.25 percentage point to 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.

Growth among Norway’s trading partners slowed through 2018 after having been on the rise for several years. Unemployment is low in many countries. So far in 2019, external growth has been broadly in line with projections. There is still considerable uncertainty surrounding the UK’s exit from the EU, and since the June 2019 Monetary Policy Report, trade tensions have deepened. This has weakened growth prospects for trading partners. Foreign interest rates have fallen. At the beginning of this week, oil prices rose following an attack on major oil facilities in Saudi Arabia. Futures prices show little change from June.

The upswing in the Norwegian economy has persisted for three years. Employment has risen, and unemployment has fallen. In 2019, high activity in oil services in particular is contributing to sustaining growth in the mainland economy. There are prospects that growth will slow further out, partly owing to lower investment on the Norwegian shelf.

Growth in the mainland economy in 2019 Q2 was broadly in line with projections. According to the enterprises in Norges Bank’s Regional Network, output growth has remained solid in recent months. In the period ahead, contacts expect slightly slower growth, in line with the projections in the June Report. Developments in employment and unemployment have been approximately as projected. Despite solid growth in employment, labour shortages appear to be moderate. This may be an indication that the labour market is somewhat less tight than previously assumed.

Consumer price inflation has moderated over the past half-year, after having picked up markedly through 2018. Lower energy price inflation in particular has restrained the general rise in prices. Underlying inflation has also moderated and is close to the target.

Since the June Report, inflation has been a little lower than projected. The 12-month rise in the consumer price index (CPI) was 1.6% in August. Adjusted for tax changes and excluding energy products (CPI-ATE), inflation was 2.1%. Labour market tightening in recent years has pushed up wage growth. There are prospects that wage growth ahead may be somewhat lower than projected in June.

The krone has depreciated markedly and is weaker than projected in June. The krone’s weakness may be partly attributable to persistent uncertainty about global developments. A weaker krone improves cost competitiveness for Norwegian firms. The krone depreciation will also contribute to higher inflation.

Household debt ratios are high, and house prices are at historically high levels. Debt growth has abated over the past two years, and house price inflation has been moderate, partly reflecting the interest rate increases over the past year. Since the June Report, house price inflation has been a little higher than projected.

In its discussion of the risk outlook, the Executive Board focused in particular on global developments. The events in the Middle East are adding to general uncertainty, including uncertainty about oil prices. The very low level of foreign interest rates may be a signal of weaker-than-projected growth prospects. Should the UK exit the EU without a deal, or if trade tensions deepen further, both external and domestic growth may turn out lower than projected. Owing to persistent global uncertainties, the krone may prove to be weaker than assumed.

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.

Over the past year, the policy rate has been raised, and the monetary stance has become gradually less expansionary. In the Executive Board’s assessment, the overall outlook and balance of risks suggest a slightly higher policy rate. Underlying inflation is close to the inflation target. Growth in the Norwegian economy remains solid, and capacity utilisation is somewhat above a normal level. This suggests in isolation a higher policy rate. A higher policy rate may also mitigate the risk of a renewed acceleration in debt growth and house price inflation. At the same time, foreign interest rates are very low, and there is considerable uncertainty surrounding global growth prospects. This suggests a cautious approach to interest rate setting.

The policy rate forecast indicates a slightly smaller rate rise than in the June Report. Weaker growth prospects and lower interest rates abroad have contributed to the downward revision. Slightly lower inflation and a somewhat less tight domestic labour market compared with the June projections have also pulled down the rate path. A weaker-than-projected krone has in isolation pulled up the policy rate path. 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 or the balance of risks.

The Executive Board has decided to raise the policy rate by 0.25 percentage point to 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 September 2019

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 Q3 in a letter to the Ministry of Finance
• The decision basis for Norges Bank's advice is presented in Section 6 of the September 2019 Monetary Policy Report and Indicators of financial imbalances