In Monetary Policy Report 1/21, which was published on 18 March, the Committee’s assessment was that the policy rate would most likely be raised in the latter half of 2021. The policy rate forecast implied a gradual rate rise thereafter. Capacity utilisation was projected to increase and unemployment to decline so that the output gap turns positive at the beginning of 2022. Underlying inflation was expected to edge down over the next year and a half, before rising to somewhat below 2 percent towards the end of 2024.

A new set of forecasts for the economy was not prepared for the monetary policy meeting on 5 May. New information was assessed against the projections in the March Report.

High infection rates continue to put a drag on the global recovery

Overall economic activity among Norway’s trading partners appears to have been somewhat higher in 2021 Q1 than projected in the March Report, but there are substantial cross-country differences. In the US, where the vaccination programme has made considerable progress, activity has shown a pronounced rebound. Direct government payments to much of the US population are boosting consumption. On the other hand, a number of euro area countries have tightened or extended containment measures in recent weeks, which will weigh on growth in the near term.

As a rising share of the population is vaccinated, growth is expected to pick up among Norway’s trading partners. New, more contagious virus variants, vaccine problems and high infection rates in some emerging economies are still clouding the economic outlook. Core inflation remains low globally, while commodity prices and freight rates have risen further since March.

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

Global equity indexes have edged higher since March on the back of progress in vaccination programmes and prospects for reopening in a number of countries. Long-term interest rates moved up among Norway’s main trading partners in the period to the monetary policy meeting in March, but have since been relatively stable. Oil prices are little changed since March, while gas prices have continued to rise. The krone exchange rate, measured by the import-weighted index (I-44), has appreciated broadly in line with the projections in the March Report. The premium in the Norwegian money market has fallen and is now somewhat lower than the projection for 2021 Q2. Estimated Norwegian forward rates have also edged lower, but still 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 declining in January, mainland GDP fell further between January and February, as projected in the March Report. Following revisions, the GDP level was nevertheless slightly lower than projected. The decline was broadly based and reflects higher infection rates and new containment measures after the new year, including tightened restrictions on entry into Norway. Activity fell especially in private services and construction. In February, mainland GDP was 2.3 percent lower than before the pandemic hit in March 2020. Household consumption of goods fell somewhat more than projected in March. At the same time, card transactions via BankAxept show an approximately unchanged level of goods and services purchases in March and April. The improvement in consumer confidence in April indicates that households have grown more optimistic about the outlook for their own financial situation and the country’s economy.

Stricter containment measures than assumed have contributed to a slightly weaker labour market than projected in the March Report. Registered unemployment has been somewhat higher than expected, primarily owing to a rise in furloughed workers in retail and sales.

Recently, infection rates have fallen, and some containment measures have again been relaxed. Vaccination of the population continues, and the authorities’ plan for the further reopening of society appears to be broadly as we envisaged in March. There is uncertainty surrounding the use of some vaccines, but for now it does not appear that there will be substantial delays in the vaccination programme.

Housing market developments have been broadly in line with the projections in the March Report. Turnover in the market for existing homes and new home sales are at high levels. House prices fell slightly in April, after rising rapidly over several months. Household credit has increased less than projected in March.

In this year’s wage settlement, the Confederation of Norwegian Enterprise (NHO) and the Norwegian Confederation of Trade Unions/Confederation of Vocational Unions (LO/YS) agreed on a wage norm for manufacturing of 2.7 percent for 2021. This is consistent with the wage projection for the economy as a whole of 2.4 percent in the March Report. In 2020, a marked decline in the number of employed in low-wage industries helped to lift overall annual wage growth. In the March Report, a partial reversal of these compositional effects was expected to have some dampening effect on average wage growth in 2021. The other wage negotiations that have reached agreement have been in line with the norm for manufacturing.

Underlying inflation has moderated since autumn 2020. The 12-month rise in consumer prices adjusted for tax changes and excluding energy products (CPI-ATE) was 2.7 percent in March, as projected in the March Report. Higher electricity prices have contributed to a substantial rise in the consumer price index (CPI) since 2020, and in March, 12-month CPI inflation was 3.1 percent.

Gradual rate rise

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 been largely in line with the projections in the March Report. Higher infection rates and stricter containment measures led to a rise in the number of furloughed workers earlier this spring. The first phase of the Government’s plan for the reopening of society has been implemented, and we still expect much of the adult population in Norway to be vaccinated by the end of summer. This suggests that economic activity will pick up through the year.

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. Underlying inflation is still above the target, but the krone appreciation and prospects for moderate wage growth suggest that inflation will moderate ahead. The Committee also placed weight on the marked rise in house prices since spring 2020. A long period of low interest rates increases the risk of a build-up of financial imbalances.

The Committee judges that there is need for a continued expansionary monetary policy stance. There is still uncertainty surrounding the economic recovery ahead. When there are clear signs that economic conditions are normalising, it will again be appropriate to raise the policy rate gradually from the 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 the latter half of 2021.

Øystein Olsen
Ida Wolden Bache
Ingvild Almås
Jeanette Fjære-Lindkjenn (absent)

5 May 2021

Charts May 2021 (pdf)