Monetary Pollicy Report 1 2010
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Monetary Policy Report 1 10 March Reports from the Central Bank of Norway No. 1/2010 Monetary Policy Report 1/2010 Norges Bank Oslo 2010 Address: Bankplassen 2 Postal address: Postboks 1179 Sentrum, 0107 Oslo, Norway Phone: +47 22 31 60 00 Fax: +47 22 41 31 05 E-mail: [email protected] Website: http://www.norges-bank.no Governor: Svein Gjedrem Deputy Governor: Jan F. Qvigstad Editor: Svein Gjedrem Cover and design: Burson-Marsteller Printing: 07 Lobo Media AS The text is set in 10½ point. Times New Roman / 9½ point Univers ISSN 1504-8470 (print) ISSN 1504-8497 (online) Monetary Policy Report The Report is published three times a year, in March, June and October/November. The Report assesses the inte- rest rate outlook and includes projections for developments in the Norwegian economy and analyses of selected themes. At its meeting on 3 December, the Executive Board discussed relevant themes for the Report. At the Executive Board meeting on 11 March, the economic outlook was discussed. On the basis of this discussion and a recom- mendation from Norges Bank’s management, the Executive Board adopted a monetary policy strategy for the pe- riod to the publication of the next Report on 23 June 2010 at the meeting held on 24 March. The Executive Board’s summary of the economic outlook and the monetary policy strategy is presented in Section 1. In the period to the next Report, the Executive Board’s monetary policy meetings will be held on 5 May and 23 June. 4 Table of contents Editorial 7 1. Monetary policy assessments and strategy 8 The economic situation 8 The outlook ahead and monetary policy assessments 11 Uncertainty surrounding the projections 18 Summary 20 Executive Board's strategy 21 Boxes: - Changes in the projections since Monetary Policy Report 3/09 16 - The level of the normal interest rate 22 2. The projections 23 The global economy 23 The Norwegian economy in the year ahead 25 Assumptions concerning fiscal policy and petroleum investment from 2010 to 2013 32 Box: - Evaluation of the projections for 2009 35 Annex 40 Boxes 2006 – 2010 41 Publications in 2009 and 2010 on Norges Bank's website 42 Regional network: enterprises and organisations interviewed 44 Monetary policy meetings 49 Tables and detailed projections 50 This Monetary Policy Report is based on information in the period to 18 March 2010. The monetary policy strategy in Section 1 was approved by the Executive Board on 24 March 2010. NORGES BANK MONETARY POLICY REPORT 1/2010 5 Monetary policy in Norway Objective The operational target of monetary policy is low and stable inflation, with annual consumer price inflation of approximately 2.5% over time. Implementation Norges Bank operates a flexible inflation targeting regime, so that weight is given to both variability in infla- tion and variability in output and employment. In general, the direct effects on consumer prices resulting from changes in interest rates, taxes, excise duties and extraordinary temporary disturbances are not taken into account. Monetary policy influences the economy with a lag. Norges Bank sets the interest rate with a view to stabil- ising inflation close to the target in the medium term. The horizon will depend on disturbances to which the economy is exposed and the effects on prospects for the path for inflation and the real economy. The decision-making process The main features of the analysis in the Monetary Policy Report are presented to the Executive Board for discussion at a meeting about two weeks before the Report is published. Themes of relevance to the Report have been discussed at a previous meeting. On the basis of the analysis and discussion, the Executive Board assesses the consequences for future interest rate developments, including alternative strategies. The final decision to adopt a monetary policy strategy is made on the same day as the Report is published. The strategy applies for the period up to the next Report and is presented at the end of Section 1 in the Report. The key policy rate is set by Norges Bank’s Executive Board. Decisions concerning the interest rate are nor- mally taken at the Executive Board’s monetary policy meeting every sixth week. The analyses and the mon- etary policy strategy, together with assessments of price and cost developments and conditions in the money and foreign exchange markets, form a basis for interest rate decisions. Communication of the interest rate decision The monetary policy decision is announced at 2pm on the day of the meeting. At the same time, the Execu- tive Board’s monetary policy statement is published. The statement provides an account of the main aspects of economic developments that have had a bearing on the interest rate decision and the Executive Board’s as- sessments. The Bank holds a press conference at 2:45 pm on the same day. The press release, the Executive Board’s monetary policy statement and the press conference are available on www.norges-bank.no. Reporting Norges Bank reports on the conduct of monetary policy in the Monetary Policy Report and the Annual Report. The Bank’s reporting obligation is set out in Section 75c of the Constitution, which stipulates that the Stor- ting shall supervise Norway’s monetary system, and in Section 3 of the Norges Bank Act. The Annual Report is submitted to the Ministry of Finance and communicated to the King in Council and to the Storting in the Government’s Kredittmeldingen (Credit Report). The Governor of Norges Bank provides an assessment of monetary policy in an open hearing before the Standing Committee on Finance and Economic Affairs in con- nection with the Storting deliberations on the Credit Report. 6 Editorial Gradual increase in the key policy rate In preparing this Report, 600 enterprises were contacted through Norges Bank’s regional network. The main im- pression is that output is rising, but growth is not high and some industries are still in decline. The current level of activity appears to be somewhat below the level ex- pected in autumn 2009. Wage growth also appears to be weaker than projected and inflation may be somewhat lower than anticipated. Growth is strong in Asia, but the upswing in Europe is only moderate. In recent months, developments have been fairly weak among Norway’s neighbouring countries. Rapidly rising government debt has fuelled uncertainty about developments, and fiscal tightening has begun in some countries. Low interest rates have contributed to holding up activity. Since autumn, expectations of interest rate hikes in Europe and the US have been moved forward into the future and the Norwegian krone has been stron- ger than expected. Norges Bank raised the key policy rate by a total of 0.50 percentage point towards the end of 2009. The Executive Board’s strategy is that the key policy rate should be in the interval 1½–2½% in the period to the publication of the next Monetary Policy Report on 23 June unless the Norwegian economy is exposed to new major shocks. The projections in this Report do not differ substantially from those in the October Report. Based on our current assessment, the interest rate increase will occur somewhat later than expected in autumn 2009, more in line with the outlook in summer 2009. The projections in this Report imply that the key policy rate will increase to about 2½% around the end of the year and increase further towards a more normal level thereafter. Jan F. Qvigstad 24 March 2010 NORGES BANK MONETARY POLICY REPORT 1/2010 7 Chart 1.1 Manufacturing output in OECD and emerging markets1). Twelve-month change. Per cent. January 2002 – December 2009 1 Monetary policy 25 25 20 OECD Central and Eastern Europe Asia Latin America 20 assessments and 15 15 10 10 strategy 5 5 0 0 -5 -5 The economic situation -10 -10 The most acute phase of the global economic crisis ap- -15 -15 -20 -20 pears to have passed. Output growth has resumed in most -25 -25 parts of the world and the recovery has been strongest in 2002 2003 2004 2005 2006 2007 2008 2009 2 010 emerging market economies in Asia (see Chart 1.1). It 1) Weighted by GDP weights (PPP). See Economic Commentaries 8/2009 for an overview of countries included in the different regions appears, however, that the upturn in advanced econo- Sources: IMF, Thomson Reuters and Norges Bank mies will only be moderate. Substantial spare output ca- pacity will continue to have an impact on many coun- Chart 1.2 Unemployment. Share of labour force. Per cent. Seasonally adjusted. tries ahead. January 1970 – February 2010 12 12 The crisis has given rise to new imbalances that will dam- 10 10 pen the recovery. Fiscal deficits are substantial in many countries and government debt is rising rapidly. Higher 8 8 risk premiums on government bonds have pushed up bor- 6 6 rowing costs for some governments. Deficits have increa- 4 4 sed markedly because of reduced tax revenues and sti- US Euro area mulus measures to underpin activity, but also due to 2 2 UK government support measures for banks. Debt growth Sweden 0 0 may become self-reinforcing unless tax revenues increa- 1970 1 9 7 4 1978 1982 1986 1990 1994 1998 2002 2006 2 010 se or spending is reduced quickly enough. Reducing go- Source: Thomson Reuters vernment debt in the US and many European countries will probably take several years. Even with substantial tax cuts, strong growth in public spending and low interest rates, unemployment has risen considerably in both the US and Europe.