In Monetary Policy Report 4/20, which was published on 17 December, the Committee’s assessment was that the policy rate would most likely remain at zero percent for some time ahead. The policy rate forecast implied a rate at the current level for over a year ahead, followed by a gradual rise as activity in the Norwegian economy approaches a more normal level. There were prospects that capacity utilisation would gradually increase and that the output gap would close during 2022. Unemployment was projected to decline, but remain somewhat higher than prior to the pandemic throughout the projection period. Underlying inflation was projected to edge down over the next year and a half, before rising to somewhat above 1.5% towards the end of 2023.

A new set of forecasts for the economy was not prepared for the monetary policy meeting on 20 January. New information was assessed against the projections in the December Report.

High infection rates put a drag on the global recovery

Following a sharp upswing among Norway’s trading partners through summer and autumn, growth appears to have slowed in Q4, but likely less so than projected in the December Report. Infection rates have recently been high, and a number of European countries have tightened containment measures. This is expected to act as a drag on growth in the coming period. On the other hand, vaccination is well under way in many countries. The US Congress passed a new large fiscal stimulus package right before the turn of the year, and the new president has announced that more would follow. The UK and the EU agreed on a trade deal securing “zero tariff, zero quota” goods trade.

Global equity indexes have risen since the December Report. Ten-year government bond yields have edged up lately, especially in the US. Central banks continue to signal that monetary policy will remain very expansionary ahead. Trading partners’ forward rates are little changed since December and indicate expectations that policy rates will remain close to zero in the coming years.

Oil prices have risen and are higher than in December. At the same time, the krone has appreciated and is stronger than projected. The premium in the Norwegian money market has risen and is now higher than the estimate for Q1. Estimated Norwegian forward rates are little changed and indicate expectations of a policy rate hike towards the end of 2021.

Higher infection rates and stricter containment measures weigh on activity in the Norwegian economy

After rising for several months, mainland GDP fell by 0.9 percent between October and November. Activity fell especially in industries affected by stricter containment measures in autumn, such as hotels and food service, transport, culture and entertainment. The decline in the mainland economy was less pronounced than projected in the December Report, with private commercial services in particular showing slightly higher-than-expected activity. Activity in the mainland economy in November was 2.4 percent lower than before the onset of the pandemic in March.

Owing to the increase in infection rates and stricter containment measures from the beginning of January, the slowdown in the economy may persist somewhat longer than projected in the December Report. On the other hand, vaccination is well under way, and it appears that the vaccination rollout will be somewhat faster than assumed earlier. Vaccination and the winding down of containment measures will boost growth further out in 2021.

Activity in the market for existing homes was also high in December, and new home sales have continued to move up. House prices rose further in December. The increase in both house prices and household credit has been broadly in line with the projections in the December Report.

After rising in November, registered unemployment fell in December, in line with the projections in the December Report. The fall primarily reflects a decline in the number of ordinary fully unemployed. The latest weekly unemployment data indicate that seasonally adjusted unemployment may turn out somewhat higher in the near term than projected in December. Recent wage settlements are consistent with the assumptions in the December Report.

Underlying inflation rose a little in December, but was somewhat lower than projected. The 12-month rise in consumer prices adjusted for tax changes and excluding energy products (CPI-ATE) was 3.0 percent in December, while the rise in the consumer price index (CPI) was 1.4 percent.

Continued low policy rate

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.

In the Committee’s assessment, economic developments have so far been broadly in line with the projections in the December Report. The recovery is now being held back by higher infection rates and stricter containment measures. At the same time, vaccination is well under way, and economic growth is expected to pick up further out in 2021.

Underlying inflation is above the target, but the krone appreciation since March and prospects for low wage growth suggest that it will moderate ahead.

In the Committee’s assessment, the sharp economic downturn and considerable uncertainty surrounding the outlook suggest keeping the policy rate on hold until there are clear signs that economic conditions are normalising. Low interest rates are contributing to speeding up the return to more normal output and employment levels. This reduces the risk of unemployment becoming entrenched at a high level. On the other hand, house prices have risen markedly since spring, and a long period of low interest rates increases the risk of a build-up of financial imbalances.

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 remain at today’s level for some time ahead.

Øystein Olsen
Ida Wolden Bache
Ingvild Almås
Jeanette Fjære-Lindkjenn

20 January 2021

Charts - policy rate meeting (pdf)