A new set of forecasts for the economy was not prepared for the monetary policy meeting on 17 August. New information was assessed against the projections in Monetary Policy Report 2/22, which was published on 23 June.

In the June Report, the Committee’s assessment was that the policy rate would most likely be raised to 1.5 percent in August. The forecast implied a further rise to around 3 percent in the period to summer 2023. There were prospects that inflation would drift down and approach target further out. Capacity utilisation was projected to remain above a normal level in the coming years, and unemployment was projected to remain low.

High inflation and weaker global growth outlook

High energy prices and the combination of strong demand and supply constraints have led to a pronounced rise in global consumer price inflation. Headline inflation among a number of Norway’s trading partners has been at its highest rate in several decades. Underlying inflation is also high and has been broadly in line with projections. Gas and electricity prices have risen sharply over summer and may push up inflation abroad in the near term. At the same time, prices for oil, metals and agricultural products have fallen a little. Global supply chain disruptions also appear to have eased somewhat.

Central banks in a number of trading partner countries have responded to the surge in inflation by raising policy rates substantially since the June Report. High inflation and higher interest rates are reducing household purchasing power. Economic activity among trading partners appears on the whole to have been higher than projected in the June Report. Nevertheless, leading indicators suggest that the growth outlook, especially for the euro area and the UK, is weaker than in June. The IMF has revised down its global growth forecast.

Global policy rate expectations have fallen since the June Report. Global equity markets have rebounded somewhat on the back of lower interest rate expectations and positive corporate earnings reports for 2022 Q2.

Very near-term Norwegian policy rate expectations have risen, but somewhat longer-term expectations have fallen. Market rates indicate expectations of further rate increases through the year. The rise in residential mortgage rates has been approximately as expected. The krone has appreciated and has been stronger than projected.

High activity in the Norwegian economy and a tight labour market

Activity in the Norwegian economy is high. Following a period of strong growth, mainland GDP edged down in spring, owing in part to a fall in manufacturing output and retail trade. According to Statistics Norway’s business sentiment survey, the share of manufacturing firms reporting supply constraints on output declined slightly between Q1 and Q2, but is still high.

The labour market is tight. Employment has risen further in line with expectations, and the level of job vacancies is still high. Registered unemployment has declined to 1.6 percent and is a little lower than projected.

As expected, house prices have shown little change through summer. Turnover of both new and existing homes has recently declined.

Markedly higher inflation than projected

Inflation in Norway has risen substantially. The 12-month rise in the consumer price index adjusted for tax changes and excluding energy products (CPI-ATE) was 4.5 percent in July, markedly higher than projected. Prices for both domestically produced goods and services and imported goods have risen more than expected. Food prices in particular have pulled up inflation, but prices for a range of other goods and services have also risen by more than normal. Other underlying inflation indicators have also moved up and are somewhat higher than the CPI-ATE.

The overall consumer price index (CPI) has been pushed up by higher energy prices. Government support to compensate for the surge in electricity prices has curbed the increase in energy prices faced by households. Twelve-month CPI inflation was 6.8 percent in July, which was higher than projected in the June Report.

Register-based wage statistics indicate that wage growth in the first half of 2022 may have been higher than projected.

Need for higher interest rates in Norway

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.

Inflation has been considerably higher than projected and markedly above the target. Activity in the Norwegian economy is high, with little spare capacity. Unemployment has fallen a little more than expected and is at a very low level.

It is the Committee’s assessment that a markedly higher policy rate is needed to ease the pressures in the Norwegian economy and to bring inflation down towards the target. The rise in prices has been broad-based in recent months and may entail that inflation will remain high for longer than expected earlier. This suggests a faster rise in the policy rate than forecast in June. A faster rate rise now will reduce the risk of inflation becoming entrenched at a high level and the need for a sharper tightening of monetary policy further out.

The Committee was concerned with the large degree of uncertainty surrounding the outlook. There is a risk that little spare capacity in the Norwegian economy and persistent global price pressures will lead to a further acceleration in price inflation. On the other hand, the rise in interest rates and high inflation may cool down the housing market and curb household consumption faster than currently envisaged. There is also a risk of a sharper slowdown in global growth.

The Committee decided unanimously to raise the policy rate to 1.75 percent. Based on the Committee’s current assessment of the outlook and balance of risks, the policy rate will most likely be raised further in September.

Ida Wolden Bache
Øystein Børsum
Ingvild Almås
Jeanette Fjære-Lindkjenn

17 August 2022

Charts - Monetary policy meeting - August 2022 (pdf)