A new set of forecasts for the economy was not prepared for the monetary policy meeting on 3 November. New information was assessed against the projections in Monetary Policy Report 3/21, which was published on 23 September.

In the September Report, the Committee’s assessment was that the policy rate would most likely be raised further in December. The forecasts implied a gradual further rate rise thereafter. Capacity utilisation was projected to rise further in the coming year, while unemployment would continue to decline and then remain close to its pre-pandemic level. Underlying inflation was projected to hover around 1 percent in the coming period, before rising to close to 2 percent towards the end of 2024.

The global recovery continues

The upturn among Norway’s trading partners is continuing and economic activity is now close to pre-pandemic levels. In 2021 Q3, overall GDP growth appears to have slowed, approximately as projected in the September Report. The number of new Covid cases has fallen since September, particularly in the US, but has recently risen again in the UK and a number of other European countries.

Supply chain bottlenecks appear to be weighing on activity in a number of countries, while also leading to a substantial rise in prices for some goods and services. Together with high energy prices, this has contributed to a substantial rise in overall consumer price inflation in many countries, and inflation expectations have risen. So far, underlying inflation has moved up broadly in line with the projections, but there are prospects that inflation among trading partners may be somewhat higher ahead than previously assumed.

Both policy rate expectations and longer-term interest rates have risen globally. Higher inflation expectations and expectations that central banks will tighten monetary policy have likely pushed up interest rates.

Oil prices have risen further since September, contributing to an appreciation of the krone, which is now stronger than projected in the September Report. Following the policy rate hike to 0.25 percent in September, most banks have announced that residential mortgage rates will be increased. The money market premium has risen in line with the September projection. Norwegian forward rates have increased in recent weeks, indicating expectations of further policy rate hikes.

Continued upturn in the Norwegian economy

The reopening of society has led to a marked upswing in the Norwegian economy, and activity is higher than its pre-pandemic level. Norwegian mainland GDP increased further in August, approximately as projected in the September Report. Growth was solid in service industries, which have been hard hit by pandemic-related restrictions. Household consumption has continued to increase broadly in line with the projections.

The Government lifted almost all of the remaining pandemic-related restrictions on 25 September. Since the September Report, infection rates in Norway have risen. The number of hospitalisations has also increased.

According to Statistics Norway’s business tendency survey for 2021 Q3, respondents in manufacturing, mining and quarrying expected output growth to continue through autumn. One-third of the respondents reported supply side constraints on output, and referred in particular to greater difficulty accessing raw materials and other input goods. A number of the respondents also reported labour constraints on output.

The labour market recovery is continuing, and employment appears to have increased somewhat more in Q3 than projected in the September Report. Seasonally adjusted unemployment has fallen as projected and was 2.5 percent in October. Labour demand remains strong and the number of job vacancies is at a high level.

The central government budget bill, published at the beginning of October, calls for somewhat lower petroleum revenue spending for 2022 than projected in the September Report. The Government will present its budget bill on 8 November.

House prices have risen further in line with the projections, and sales of both new and existing homes remain high. Household credit growth has also been as expected.

High electricity prices are boosting consumer price inflation

Higher energy prices, in particular higher electricity prices, have fuelled a substantial rise in the consumer price index (CPI) since spring. In September, the 12-month rise in the CPI was 4.1 percent, which was higher than projected. Since the September Report, electricity prices have fallen slightly, and overall electricity and fuel futures prices are a little lower than in September. Underlying consumer price inflation is low. In September, 12-month CPI inflation adjusted for tax changes and excluding energy products (CPI-ATE) was 1.2 percent, broadly as expected.

Further 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 mitigating the build-up of financial imbalances.

It is the Committee’s assessment that the economic upturn in Norway is continuing broadly as expected. Unemployment has fallen further. Higher electricity prices have resulted in high consumer price inflation, but underlying inflation is lower than the inflation target. Looking ahead, higher economic activity and rising wage growth will likely lift underlying inflation, but the recent krone appreciation could curb the rise in prices.

There is still uncertainty as to the evolution of the pandemic and its impact on the Norwegian economy. Infection rates have risen again recently, but a high vaccination rate will likely limit the need for new pandemic-related restrictions. The Committee also noted that global supply chain disruptions could dampen the economic upturn and also contribute to higher inflation in Norway.

Based on the Committee’s assessment, a normalising economy suggests that it will be appropriate to raise the policy rate further from today’s level. Uncertainty surrounding the effects of higher interest rates warrants a gradual rise in the policy rate.

The Committee decided unanimously to keep the policy rate unchanged at 0.25 percent. Based on the Committee’s current assessment of the outlook and balance of risks, the policy rate will most likely be raised in December.

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

3 November 2021

Charts - Monetary policy meeting - November 2021 (pdf)