Norges Bank
The economic situation, global uncertainty and monetary policy
Deputy Governor Jarle Bergo ACI Norway, 6 September 2007
Norges Bank
Mainland GDP
Annual growth in volume. Per cent. 1971 – 2007
-2 0 2 4 6
-2 0 2 4 6
1970 1975 1980 1985 1990 1995 2000 2005
Sources: Statistics Norway and Norges Bank Growth in first half-year 2007, annualised
Unemployed
Percentage of labour force. Seasonally adjusted. Jan 83 – Aug 07
0 2 4 6 8 10
1983 1987 1991 1995 1999 2003 2007
0 2 4 6 8 10
Sources: Norwegian Labour and Welfare Organisation (NAV) and Statistics Norway LFS unemployment
Registered unemployed
Registered unemployed and on ordinary labour market programs
Norges Bank
Inflation
CPI and CPI-ATE. 12-month change. Per cent
-2 0 2 4 6
2002 2003 2004 2005 2006 2007
-2 0 2 4 6
CPI-ATE Inflation target CPI
Norges Bank
Terms of trade
Index, 1995 = 100. 1995 – 2006
90 110 130 150 170 190
1995 1997 1999 2001 2003 2005
90 110 130 150 170 190
Traditional goods and services Total
Sources: Statistics Norway and Norges Bank
Norges Bank
Monetary policy in Norway
Objective:
• Low and stable inflation – approximately 2.5 per cent over time
Implementation:
• A flexible inflation targeting regime
• The interest rate is set with a view to stabilising inflation close to target in the medium turn
• The horizon will depend on the disturbances to
which the economy is exposed
-2 -1 0 1 2 3
2004 2005 2006 2007 2008 2009 -2 -1 0 1 2 3
0 1 2 3 4
2004 2005 2006 2007 2008 2009 0 1 2 3 4
0 1 2 3 4 5 6 7
2004 2005 2006 2007 2008 2009 0 1 2 3 4 5 6 7
Inflation Output gap
Inflation target
Balanced output developments
Interval for normal interest rate Key policy rate
Sources: Statistics Norway and Norges Bank
Norges Bank
0 1 2 3 4
2005 2006 2007 2008 2009 2010 0 1 2 3 4
Baseline scenario in Monetary Policy Report 2/07
Per cent. 2005 Q1 – 2010 Q4
0 1 2 3 4 5 6 7 8 9
2005 2006 2007 2008 2009 2010 0 1 2 3 4 5 6 7 8 9
-2 -1 0 1 2 3 4
2005 2006 2007 2008 2009 2010 -2 -1 0 1 2 3 4
-1 0 1 2 3 4
2005 2006 2007 2008 2009 2010 -1 0 1 2 3 4
30%
50%
70%
90%
Output gap
CPI-ATE Key policy rate
CPI
Norges Bank
Credit spreads on bonds secured on subprime loans and ordinary mortgage loans with rating BBB-
Basis points. 19 January 2006 – 30 August 2007
0 500 1000 1500 2000 2500
Jan-06 May-06 Sep-06 Jan-07 May-07
0 500 1000 1500 2000 2500
Subprime H1 2006, BBB-
Subprime H2 2006, BBB-
MBS (Mortgage Backed Securities), BBB- Subprime H1 2007, BBB-
Source: Lehman Brothers
Norges Bank
3.0 3.5 4.0 4.5 5.0 5.5 6.0 6.5
Jan-07 Feb-07 Mar-07 Apr-07 May-07 Jun-07 Jul-07 Aug-07 Sep-07 3.0
3.5 4.0 4.5 5.0 5.5 6.0 6.5
Source: Reuters (EcoWin)
Treasury bills Asset backed commercial papers Libor
US interest rates with varying degree of risk
90-day rates. Daily figures
Price of hedging credit risk. 5-year CDS prices for banks
Basis points. 1 June 2005 – 31 August 2007
Sources: Bloomberg, Reuters and Thomson Datastream
0 10 20 30 40 50 60 70
Jun-05 Oct-05 Feb-06 Jun-06 Oct-06 Feb-07 Jun-07
0 10 20 30 40 50 60 70
DnB NOR
JP Morgan Chase
European banks (Itraxx-index)
Citigroup
Norges Bank
1 2 3 4 5 6
2005 2006 2007 2008 2009 2010
1 2 3 4 5 6
US
Euro area
31 August 2007
Market after MPR 2/07 (27 June)
Norway
Policy rates and forward rates
Per cent. Forward rates at 27 June and 31 August 2007
Norges Bank
85 88 91 94 97 100 103
2002 2003 2004 2005 2006 2007 2008 2009 2010 -1 0 1 2 3 4 5
I-44
(left-hand scale)
Weighted interest rate differential (right-hand scale)
31 August 2007
1)A rising curve denotes an appreciation of the krone.
3-month interest rate differential
and import-weighted exchange rate (I-44)
1)January 2002 – December 2010
Previous MPR (27 June 2007)
Sources: Reuters (EcoWin), Bloomberg and Norges Bank
Norges Bank
Import-weighted exchange rate (I-44)
Actual developments and projections. 2002 Q1 – 2007 Q4
85 90 95 100
2002 2003 2004 2005 2006 2007
85 90 95 100
IR 05/1 IR 05/3 IR 06/1 IR 06/2 IR 06/3 MPR 1/07 MPR 2/07 Actual developments
Source: Norges Bank
Trade-weighted exchange rate
Index. Week 1 1992 = 100
65 80 95 110 125 140
1992 1994 1996 1998 2000 2002 2004 2006
65 80 95 110 125 140
Switzerland
Sweden
Norway
United Kingdom
Source: Reuters (EcoWin)
DepreciationAppreciation
Norges Bank
65 80 95 110 125 140
1992 1994 1996 1998 2000 2002 2004 2006
65 80 95 110 125 140
New Zealand
Australia
Canada
Norway
DepreciationAppreciation
Trade-weighted exchange rate – exporters of commodities
Index. Week 1 1992 = 100
Norges Bank
Import-weighted exchange rate in the baseline scenario
in IR 3/06 og MPR 1/07
75 80 85 90 95 100 105
2005 2006 2007 2008 2009 75 80 85 90 95 100 105
0 1 2 3 4 5 6
2005 2006 2007 2008 2009 0 1 2 3 4 5 6
Key policy rate in the baseline scenario in IR 3/06 and the isolated
effect of a stronger exchange rate
IR 3/06 MPR 1/07
IR 3/06
Isolated effect of stronger exchange rate in MPR 1/07
How does a change in the exchange rate influence the interest rate path?
Example from MPR 1/07
Source: Norges Bank
Norges Bank
-20 -15 -10 -5 0 5 10 15 20
1970 1975 1980 1985 1990 1995 2000 2005 -20 -15 -10 -5 0 5 10 15 20
Real exchange rates
Deviation from mean 1970-2006. Per cent. 1970-20061)
Sources: Statistics Norway, Technical Reporting Committee on Income Settlements, Ministry of Finance and Norges Bank
Relative prices
Relative wage costs 2007
1)The numbers for 2007 are based on projections from MPR 2/06 and TWI so far this year
DepreciationAppreciation
