Øystein Olsen: The conduct of monetary policy
Introductory statement by Mr Øystein Olsen, Governor of Norges Bank (Central Bank of Norway),
at the hearing before the Standing Committee on Finance and Economic Affairs of the Storting
(Norwegian parliament), Oslo, 9 May 2019.
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Accompanying slides of the speech.
Please note that the text below may differ from the actual presentation.
Thank you for this opportunity to report on the conduct of monetary policy. My introduction here
today is based on Norges Bank's Annual Report for 2018 and our monetary policy assessments
up to the monetary policy meeting yesterday.
Since 2001, the main objective of monetary policy in Norway has been low and stable inflation. In
March 2018, a new Monetary Policy Regulation was laid down. The inflation target was lowered
from 2.5 to 2 percent. At the same time, the Regulation specified that inflation targeting shall be
forward-looking and flexible so that it can contribute to high and stable output and employment
and to counteracting the build-up of financial imbalances.
When I stood here about a year ago, I concluded that the outlook for the Norwegian economy
was bright. We were emerging from the downturn that followed in the wake of the oil price
decline in 2014. Growth was again on a firm footing and unemployment had declined. There were
prospects that the policy rate would shortly be raised. I emphasised that this was a good sign.
In September 2018, Norges Bank raised the policy rate for the first time in over seven years. The
rate was raised further in March of this year, and is now 1 percent. Gradual interest rate
normalisation means that the Norwegian economy is faring well.
The rate hikes were signalled well in advance. Norges Bank places substantial emphasis on
clear and effective communication of policy rate prospects.
Our main channel of communication is the Monetary Policy Report, which contains a thorough
assessment of information about developments in the Norwegian economy and the background
for the monetary policy decision. In order to reach a broader audience, we communicate through
different channels. We give speeches and presentations throughout the country where we
address local business leaders, the financial industry or university and college students.
In 2018, we launched a new product on our website - Pengepolitikken kort fortalt [Monetary
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policy in brief]. This product is aimed in particular at those looking for background on the interest
rate decision in a more simplified and relatable version. The message, of course, is the same as
in our Monetary Policy Report.
Chart: GDP for Norway's trading partners
Let me return to economic developments.
Norway's trading partners have experienced a broad economic upturn in recent years. This has
led to a considerable improvement in labour market conditions, and wage growth has gradually
begun to rise. In 2018, growth among trading partners slowed somewhat, particularly in Europe.
Heightened uncertainty had likely contributed to dampening growth. Among other things, there
was considerable uncertainty surrounding trade tensions between the US and China and the
UK's withdrawal from the EU. Despite somewhat lower growth, unemployment continued to edge
down in many countries. US unemployment is now the lowest in 50 years. Consumer price
inflation among trading partners picked up in 2018, mainly owing to higher energy prices.
Underlying inflation was fairly stable among our main trading partners.
Chart: International interest rates
Official policy rates in the US, UK and Sweden were raised in 2018. The US federal funds rate
has been raised in several steps in recent years, and the target range is now 2.25 to 2.5 percent.
Nevertheless, the global interest rate level remains low, and market expectations indicate a low
level in the years ahead. In the euro area, there are prospects that the ECB deposit facility rate
will be negative for some time to come.
Chart: Oil prices and the krone exchange rate
The tailwind from the rebound in oil prices has provided a considerable boost to the Norwegian
economy in recent years. Oil prices have more than doubled since the low in early 2016. In 2018,
oil prices were highly volatile in periods, primarily reflecting supply-side conditions. Towards the
end of 2018, uncertainty about global economic prospects had a dampening impact on oil prices.
After rising to above USD 85 per barrel through autumn, oil prices fell to below USD 55 per barrel
at year-end. Prices have edged up again since then.
Despite the rise in oil prices, the Norwegian krone has been fairly weak since 2014. A weak krone
has a positive influence on exporting companies. At the same time, prices for imported goods
and services increase. A weaker krone therefore leads to higher inflation. Measured by the
import-weighted exchange rate index (I-44), the krone appreciated somewhat in the period to
autumn 2018, but depreciated again towards year-end. The depreciation coincided with a fall in
oil prices and heightened uncertainty in global financial markets.
Chart: Growth mainland Norway
Growth in the Norwegian economy has been solid since autumn 2016. At the same time, labour
market conditions have improved considerably. The number of employed has increased by more
than 100 000, and unemployment has declined. Solid global growth, higher oil prices and low
interest rates have contributed to lifting growth. The enterprises in Norges Bank's Regional
Network reported rising output growth through 2018, particularly for oil service providers thanks to
the rebound in petroleum investment on the Norwegian shelf following several years of decline.
There was also a pick-up in exports from oil service companies.
Chart: Employment as a share of the population
After some years of solid growth, spare capacity has gradually diminished. At the end of 2018,
capacity utilisation appeared to be close to what we regard as a normal level. Employment also
appears to have returned to a more normal level. Owing to a high employment rate, the number
of employed persons as a share of the working-age population is now close to the level prevailing
before the sharp fall in oil prices in 2014.
In 2018, employment rose in most sectors of the Norwegian economy, including oil-related
industries. More people entered the labour market, but unemployment nonetheless edged down.
There are signs of growing pressures in the economy. A rising number of Regional Network
contacts report little spare capacity. A number of employers report difficulties in finding skilled
and experienced labour.
In the wake of the oil price decline, wage growth has been moderate. The improvement in the
labour market has contributed to a pick-up in wage growth in recent years. At the same time,
inflation has been high. As a result, real wage growth has been low, with little improvement in
household purchasing power.
Chart: Consumer prices
Consumer price inflation edged up through 2018, primarily reflecting a sharp increase in
electricity prices. Underlying inflation also moved up, partly owing to the pick-up in wage growth
and higher imported inflation. Annual consumer price inflation (CPI) was 2.7 percent in 2018.
Persistently high debt growth has added to the vulnerability of the household sector. High house
price inflation has fuelled debt growth. In 2018, house price inflation was low, and debt growth
eased somewhat. Debt nevertheless grew faster than household disposable income. Because of
a high household debt burden, the effect of an interest rate rise will likely be stronger than earlier.
Chart: Policy rate
The monetary policy assessments through 2018 attached weight to the fact that the monetary
stance is expansionary. The policy rate increase is intended to prevent a rise in pressures in the
economy that would trigger an acceleration in price and wage inflation. A higher interest rate also
mitigates the risk of a renewed, rapid rise in property prices and debt. High price and wage
inflation and a further build-up of financial imbalances would increase the risk of a sharp
economic downturn further out.
The plan is to move gradually to a more normal interest rate level. Our assessment in March was
that capacity utilisation was slightly above a normal level. At the same time, underlying inflation
was a little higher than the inflation target of 2 percent. Our projections implied that the policy rate
would be raised in the course of the next half-year. There were also prospects that the policy rate
would rise to 1.75 percent by the end of 2022. This means that the average residential mortgage
rate could increase from 2.6 percent in March to 3.5 percent in the course of the same period.
We therefore believe that interest rates will not be as high as in previous upturns.
With that path for the policy rate, inflation is projected to be close to target in the years ahead, at
the same time as unemployment remains low. More persons employed and prospects of higher
wage growth will contribute to lifting income. Despite higher interest rates, there are prospects
that most households will experience an improvement in purchasing power in the coming years.
The risk outlook is dominated by global developments. Over the past year, rising protectionism
and political uncertainty have weighed on global growth. The UK's relations with the EU have yet
to be clarified. If trade tensions deepen, growth among trading partners may be lower than we
projected in March.
The uncertainty surrounding global developments and the effects of monetary policy suggests a
cautious approach to interest rate setting.
Our most recent monetary policy meeting was held yesterday, and we published the decision
earlier today. Since the publication of our March projections, capacity utilisation appears to be
rising as expected, while inflation has been a little higher than projected. Global uncertainty
persists. At its monetary policy meeting, the Executive Board decided to keep the policy rate
unchanged at 1.0 percent. The Executive Board's current assessment of the outlook and
balance of risks suggests that the policy rate will most likely be raised in June.
Our mission is to deliver low and stable inflation, while contributing to high and stable output and
employment. Should economic developments diverge from our current projections, the policy
rate path will be adjusted.
Thank you for your attention.