A new set of forecasts for the economy was not prepared for the monetary policy meeting on 18 August. New information was assessed against the projections in Monetary Policy Report 2/21, which was published on 17 June.

In the June Report, the Committee’s assessment was that the policy rate would most likely be raised in September. The forecasts implied a gradual rate rise thereafter. Capacity utilisation was projected to increase and unemployment to decline so that unemployment would return to pre-pandemic levels in the course of 2022. Underlying inflation was projected to edge down over the next half-year, before rising to 1.6 percent towards the end of 2024.

The global recovery has continued

Overall economic activity among Norway’s trading partners appears to have risen broadly as projected in the June Report. In 2021 Q2, GDP growth in the euro area and China picked up in line with the projections, while the recovery in the US was weaker than expected. The spread of the Delta variant has recently resulted in higher infection rates, and in some countries, Covid-related restrictions have been tightened. Underlying inflation among trading partners has increased and has been higher than expected.

Central banks are signalling that monetary policy will remain expansionary ahead. Trading partners’ forward rates are little changed since June and indicate expectations that policy rates will remain close to zero for some time.

Long-term interest rates have fallen after the emergence of new virus variants has created uncertainty regarding the economic outlook. This uncertainty may also have affected the krone exchange rate, which is now weaker than projected in the June Report. Oil prices are little changed since June, while gas prices have continued to rise.

Norwegian money market premiums have edged higher, but have so far been somewhat lower than the projection for Q3. Norwegian forward rates indicate expectations of a gradual rise in the policy rate from autumn.

Easing of Covid-related restrictions lifts growth in the Norwegian economy

Mainland GDP expanded in April and May following the easing of Covid-related restrictions. Activity in May was higher than projected in the June Report but has not yet returned to its pre-pandemic level. Retail trade showed a particularly sharp rise, reflecting the reopening of a large number of shops. Developments in household consumption have been stronger than projected in the June Report.

The labour market has improved in pace with the easing of Covid-related restrictions. Seasonally adjusted registered unemployment has fallen as projected and was 3.0 percent of the labour force in July. The number of long-term unemployed remains high.

Infection rates in Norway have risen recently, but the number of hospitalisations has remained at a low level. The reopening of society appears to be continuing in line with the assumptions in the June Report, and much of the adult population has received at least one vaccine dose. The high vaccination rate is reducing the need for Covid-related restrictions, and the economic impact of higher infection rates is therefore expected to be milder than earlier.

House price inflation has moderated further through summer and has been lower than projected. Sales of both new and existing homes have been high in recent months, and the stock of unsold existing homes remains at a low level. Household credit growth has been broadly in line with the projections.

Lower inflation

Underlying consumer price inflation has declined in recent months, approximately as projected in the June Report. In July, the 12-month rise in the consumer price index adjusted for tax changes and excluding energy products (CPI-ATE) was 1.1 percent. The rise in prices for imported consumer goods has been a good deal faster than projected, while prices for domestically produced goods and services have risen less than expected. Higher electricity prices have contributed to a substantial rise in the consumer price index (CPI). In July, 12-month CPI inflation was 3.0 percent, broadly as expected. Wage growth appears to have been in line with the projections.

Rate hike most likely in September

The operational target of monetary policy is annual consumer price inflation of close to 2 percent 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.

It is the Committee’s assessment that economic developments have been broadly as expected. The reopening of society has driven a marked rise in activity, and unemployment has fallen further. At the same time, there is still uncertainty as to the evolution of the pandemic and the impact on the Norwegian economy. A high vaccination rate reduces the need for Covid-related restrictions. Nevertheless, it cannot be ruled out that new virus variants may lead to a retightening of restrictions. Underlying inflation has declined and is below the 2 percent target. Increased activity in the Norwegian economy suggests that inflation will pick up further out.

In considering the trade-offs facing monetary policy, the Committee placed weight on the contribution of low interest rates to speeding up the return to more normal output and employment levels. This reduces the risk of unemployment becoming entrenched at a high level and will help to bring inflation back towards the target. At the same time, a long period of low interest rates increases the risk of a build-up of financial imbalances. The Committee noted that house price inflation has moderated recently, following a marked rise in the period to spring.

The Committee judges that there is still a need for an expansionary monetary policy stance. At the same time, economic conditions are starting to normalise. This suggests that it will soon be appropriate to raise the policy rate from today’s level.

The Committee decided unanimously to keep the policy rate unchanged at zero percent. In the Committee’s current assessment of the outlook and balance of risks, the policy rate will most likely be raised in September.

Øystein Olsen
Ida Wolden Bache
Ingvild Almås
Øystein Børsum
Jeanette Fjære-Lindkjenn

18 August 2021

Charts - Monetary policy meeting - August 2021 (pdf)