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The following OECD assessment and recommendations summarise Chapter 2 of the Economic survey of Norway published on 30 January 2007.
See also the excerpt "Monetary Policy under Low Inflation".
Should monetary policy tighten faster?
Since 2003, underlying inflation has remained well below the target of Norges Bank of 2½ per cent. Worried that inflation expectations could become entrenched at a low level, the central bank kept its sight deposit rate at close to 2% from early 2004 to mid 2005. Thus, monetary conditions have remained quite easy for a long time. The central bank has cited various disinflationary forces to explain its policy stance – such as the increasing share of imports from low cost countries, strong competition in product markets, high productivity growth and a hard won anchoring of inflation expectations. Large migration inflows of labour may also have reduced the equilibrium unemployment rate because, in activities requiring a mix of skills (such as construction), the availability of skilled foreign workers has made it possible to employ low skilled resident workers who would otherwise have remained unemployed. Thus, when the recovery started, Norgest Bank decided to tighten in small, not too frequent steps, even though the short term interest rate was far from reaching its neutral rate interval of 5 6%, and got only about half way there by late 2006.
Domestic and imported inflation
12 month rise, per cent
1. CPI-ATE: CPI adjusted for tax changes and excluding energy products. A further adjustment is made for the estimated effect of reduced maximum day-care rates from January 2006.
Source: Norges Bank.
However, with growth having averaged 3¾ per cent annually since the recovery started, there are now signs that slack is fast disappearing. The unemployment rate seems headed for 3% close to the historical danger zone for wage inflation. More industries are reporting hiring difficulties and there are signs that wage claims may grow at a faster pace. Capacity utilisation in the economy is also rising. Thus there are risks that inflation expectations might soon start rising. Meanwhile house prices have kept increasing and adjustable rate household debts have accumulated. In view of these developments, Norges Bank recently decided to quicken the pace of normalisation. It advanced the expected return to neutrality to 2008. Nonetheless, the new pace of normalisation remains quite gradual. During the last upswing, price and cost inflation surged suddenly at the peak of the cycle, and this feature of the Norwegian economy may well remain present. Whether the forces of globalisation have reduced this risk remains untested. Hence, Norges Bank should stand ready to tighten faster than it currently envisages if wage growth picks up faster than expected, as could happen with the Spring 2007 wage rounds. The OECD’s latest economic projections suggest that such a faster tightening might indeed be necessary.
Latent inflation pressure
Source: Norges Bank, OECD Economic Outlook 80 database.
How to obtain this publication
The Policy Brief (pdf format) can be downloaded. It contains the OECD assessment and recommendations but not all of the charts included on the above pages.
The complete edition of the Economic survey of Norway 2007 is available from:
For further information please contact the Norway Desk at the OECD Economics Department at firstname.lastname@example.org. The OECD Secretariat's report was prepared by Alexandra Bibbee and Benoît Bellone under the supervision of Patrick Lenain.