Thursday, August 16, 2018

Norway holds rate, outlook and risks as forecast in June

      Norway's central bank left its key policy rate at 0.5 percent but said the upturn in the country's economy is broadly continuing as forecast in June when the executive board said the key policy rate most likely will be raised in September.
       Norges Bank (NB), which has maintained its rate since cutting it in March 2016, added that underlying inflation is below the bank's target but is still expected to rise.
      "The outlook and the balance of risks do not appear to have changed substantially since the June Report," NB Governor Oeystein Olsen said in a statement.
       In March NB began preparing investors for its first rate hike since May 2011 and then repeated this in its June monetary policy report when it forecast that the average monetary rate would rise to 0.6 percent this year and then 1.1 percent in 2019, implying two rate hikes of 25 basis points each.
       Next month NB will update its economic forecasts and the executive board is scheduled to issue its policy decision at a press conference on Sept. 20.
       In its meeting yesterday, the bank's executive board compared recent developments with its June forecast and concluded there had been little new information about the country's economy and developments among its trading partners was broadly as expected.
       Despite trade conflicts and political tensions that have pushed down some equity prices and the the exchange rate of some currencies, policy rates among Norway's trading partners have been raised in recent months and forward interest rates still indicate a gradual rise in global interest rates.
       In Norway consumption of goods fell in June and was somewhat lower than expected but manufacturing output rose in the second quarter, oil prices were little changed, house prices have edged higher and unemployment has evolved largely as expected, NB said.
      Inflation, however, has risen and is higher than expected, mainly due to higher electricity prices.
      Norway's consumer price inflation rose to 3.0 percent in July from 2.6 percent in June, and well above the central bank's recently-revised target of 2.0 percent.
     In March Norway's government lowered the inflation target from the 2.5 percent target that had been in place for 17 years, putting Norway in the same camp as most other developed economies.
     In June NB raised its forecast for average 2018 headline inflation to 2.3 percent from 2.1 percent.
     NB added today that the exchange rate of the krone was somewhat weaker than NB had assumed.
     As most currencies, the krone has fallen against the U.S. dollar this year and was trading at 8.45 today, down 3 percent.
     Against the euro, the krone has been slightly firmer, trading at 9.61 today, up 2.4 percent this year.
     After several years of weak growth, Norway's economy has improved since the start of 2017, helped by rising oil prices, pushing up wages and capacity utilization.
      But in the first quarter of this year the economy grew only 0.3 percent year-on-year, down from 1.6 percent in the previous quarter.
      In June the central bank forecast that Norway's mainland economy, which excludes the offshore oil and gas industry, would expand 2.6 percent this year and then 2.3 percent in 2019.

     Norges Bank issued the following statement:

"In Monetary Policy Report 2/18, which was published on 21 June 2018, the Executive Board's assessment was that the economic upturn was continuing and that capacity utilisation was close to a normal level. Underlying inflation was lower than the target, but rising capacity utilisation implied an increase in price and wage inflation further out. The Executive Board's assessment of the outlook and balance of risks suggested that the key policy rate would most likely be raised in September 2018.
The Executive Board's assessment is that the upturn in the Norwegian economy appears to be continuing broadly in line with the picture presented in June. Underlying inflation is below the inflation target, but the driving forces indicate that it will rise further out.
"The outlook and the balance of risks do not appear to have changed substantially since the June Report", says Governor Øystein Olsen."


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