Monetary policy report 1/18 · MONETARY POLICY REPORT 1/18 PÅL B. ULVEDAL ECON4325 – MONETARY...
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MONETARY POLICY REPORT 1/18 PÅL B. ULVEDAL ECON4325 – MONETARY POLICY (UIO) 22 MARCH 2018 The views presented here are my own, and do not necessarily reflect the views of Norges Bank
Transcript of Monetary policy report 1/18 · MONETARY POLICY REPORT 1/18 PÅL B. ULVEDAL ECON4325 – MONETARY...
MONETARY POLICY REPORT 1/18
PÅL B. ULVEDAL ECON4325 – MONETARY POLICY (UIO)
22 MARCH 2018
The views presented here are my own, and do not necessarily reflect the views of Norges Bank
Executive Board’s assessment
2
Key policy rate unchanged at 0.5 percent.
Overall, the changes in the outlook and the balance of risks imply a somewhat
earlier interest rate increase than in the December Report.
The Executive Board’s current assessment of the outlook and balance of risks suggests that the key policy rate most likely be raised after summer 2018.
Overall picture
-1
0
1
2
3
-1
0
1
2
3
2012 2014 2016 2018 2020
3
-3-2-1012
-3-2-1012
2012 2014 2016 2018 2020
0
1
2
3
4
0
1
2
3
4
2012 2014 2016 2018 2020859095100105110
859095
100105110
2012 2014 2016 2018 2020
Output gap Key policy rate
CPI-ATE Exchange rate (I-44)
MPR 1/18 MPR 4/17
2 MARCH 2018
NEW REGULATION ON MONETARY POLICY
Clarifies the monetary policy mandate
5
Section 1 “Monetary policy shall maintain monetary stability by
keeping inflation low and stable.” Section 2 “Norges Bank is responsible for the implementation of
monetary policy.”
A new and lower inflation target
6
Section 3 “The operational target of monetary policy shall be
annual consumer price inflation of close to 2 percent over time.”
Real economy and financial stability
7
Section 3 “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.”
Transparency
8
Section 4 “Norges Bank shall regularly publish the
assessments that form the basis of the implementation of monetary policy.”
Statement from Norges Bank
9
Letter of 28 February 2018 to the Ministry of Finance “In the opinion of Norges Bank, the new regulation clarifies the monetary policy
mandate and underpins the Bank’s flexible approach to inflation targeting. In
Norges Bank’s assessment, the new regulation will not result in significant changes
in the conduct of monetary policy.”
The inflation target and petroleum revenues
10
Structural non-oil budget deficit. Percent of trend mainland GDP
Source: Ministry of Finance
0
1
2
3
4
5
6
7
8
9
0
1
2
3
4
5
6
7
8
9
2000 2005 2010 2015 2020 2025 2030
Structural non-oil budget deficit
3 percent real return
Simple model to analyze the effect of a new target
11
Standard New-Keynesian model: (1) 𝑦�𝑡 = 𝐸𝑡 𝑦�𝑡+1 − 1
𝜎𝑖𝑡 − 𝐸𝑡 𝜋𝑡+1 − 𝑟𝑡𝑛
(2) 𝜋𝑡 = 𝛽𝐸𝑡 𝜋𝑡+1 + 𝜅𝑦�𝑡
Modified (behavioural) model: (3) 𝑦�𝑡 = 𝛼𝐸𝑡 𝑦�𝑡+1 − 1
𝜎𝑖𝑡 − 𝜋𝑡+1𝑒 − 𝑟𝑡𝑛
(4) 𝜋𝑡 = 𝜋𝑡+1𝑒 + 𝜅𝑦�𝑡 (5) 𝜋𝑡+1𝑒 = 𝛾𝛽𝐸𝑡 𝜋𝑡+1 + 𝛿𝜋𝑡−1 + 1 − 𝛾𝛽 − 𝛿 𝜋𝑡∗ Inflation target: (6) 𝜋𝑡∗ = 𝜋𝑡−1∗ + 𝜖𝜋∗ Loss function: (7) 𝐿𝑡 = 𝜋𝑡 − 𝜋𝑡∗ 2 + 𝜆𝑦�𝑡2
In MPR 1/18: 𝛽 is 0.99 𝛾 is called 𝛽 1𝜎 is called 𝜎
Myopic agents (α)
12
Inspired by Gabaix (2017) Agents put a lower weight on information about the future: 𝑦�𝑡 = 𝛼𝐸𝑡 𝑦�𝑡+1 − 1
𝜎�̂�𝑡
Where: �̂�𝑡 = 𝑖𝑡 − 𝜋𝑡+1𝑒 − 𝑟𝑡𝑛
Solving forward: 𝑦�𝑡 = − 1
𝜎∑ 𝛼𝑘�̂�𝑡+𝑘∞𝑘=0
A lower alpha means that agents care less about future interest
rates forward guidance becomes less effective
Effects of a lower inflation target
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-0.4
-0.2
0
-0.6
-0.4
-0.2
0
1 3 5 7 9 11
13
-0.6
-0.4
-0.2
0.0
-0.6
-0.4
-0.2
0.0
1 3 5 7 9 11
-1.0
-0.5
0.0
0.5
1.0
-1.0
-0.5
0.0
0.5
1.0
1 3 5 7 9 11-0.10.10.30.50.7
-0.10.10.30.50.7
1 3 5 7 9 11
Inflation Output gap
Nominal interest rate Real interest rate
Source: Norges Bank
Completely forward-looking
Somewhat backward-looking
More backward-looking
The importance of expectations
Effects of a lower inflation target
-0.6
-0.4
-0.2
0
-0.6
-0.4
-0.2
0
1 3 5 7 9 11
14
-0.6
-0.4
-0.2
0.0
-0.6
-0.4
-0.2
0.0
1 3 5 7 9 11
-1.0
-0.5
0.0
0.5
1.0
-1.0
-0.5
0.0
0.5
1.0
1 3 5 7 9 11-0.10.10.30.50.7
-0.10.10.30.50.7
1 3 5 7 9 11
Inflation Output gap
Nominal interest rate Real interest rate
Source: Norges Bank
Somewhat backward-looking
More backward-looking
Higher weight on λ
The importance of central bank preferences for output smoothing
Monetary policy implications of a new inflation target
15
Over time a lower inflation target will result in a correspondingly lower long-term
nominal interest rate In the near term, a lowering of the inflation target implies some monetary
tightening
The degree of tightening depends on
– how forward-looking economic agents are in their expectations formation – the weight the central bankg gives to stable developments in output and employment
Implications for the nominal rate in the near term are not unambiguous
Special Feature in MPR 1/18
Transition to a new target
-0.5
0
0.5
-0.5
0
0.5
2018 2019 2020 2021
16 Source: Norges Bank
Output gap Key policy rate
Inflation Real interest rate
-0.5
0
0.5
-0.5
0
0.5
2018 2019 2020 2021
-0.5
0
0.5
-0.5
0
0.5
2018 2019 2020 2021-0.5
0
0.5
-0.5
0
0.5
2018 2019 2020 2021
Transition to a new target
17
Factors behind changes in key policy rate forecast since MPR 4/17. Percentage points
-1
-0.5
0
0.5
1
-1
-0.5
0
0.5
1
2018Q2 2018Q4 2019Q2 2019Q4 2020Q2 2020Q4
Change in inflation target
Source: Norges Bank
18
ECONOMIC OUTLOOK
How do we work?
19
Regional Network
Statistics
‘’Big data’’
Qualitative information
Background
Empirical and theoretical models
SAM «System for
averaging models»
Judgement
Short-term forecasts
NEMO Policy model
Monetary policy analysis
Judgement
The Norwegian Economy Model (NEMO)
20
Higher growth among trading partners
21
GDP for Norway’s trading partners. Annual change. Percent. 2012 – 2021
PMI for Norway’s trading partners. Jan 2012 – Feb 2018
Sources: Thomson Reuters and Norges Bank
1
2
3
4
1
2
3
4
2012 2014 2016 2018 2020
MPR 1/18 MPR 4/17
46
48
50
52
54
56
58
46
48
50
52
54
56
58
2012 2014 2016 2018
PMI Industri
PMI tjenester
Higher interest rates abroad
22
Policy rates and estimated forward rates. Percent
Sources: Bloomberg, Thomson Reuters and Norges Bank
-1
0
1
2
3
-1
0
1
2
3
2012 2014 2016 2018 2020
USUKEuro areaSwedenForward rates MPR 1/18Forward rates MPR 4/17
Factors behind changes in key policy rate forecast
23
Factors behind changes in key policy rate forecast since MPR 4/17. Percentage points
-1
-0.5
0
0.5
1
-1
-0.5
0
0.5
1
2018Q2 2018Q4 2019Q2 2019Q4 2020Q2 2020Q4
Foreign factors Change in inflation target
Source: Norges Bank
Recent rise in money market rate
24
Norwegian three-month money market premium. Percentage points
Source: Norges Bank
0
0.2
0.4
0.6
0.8
1
0
0.2
0.4
0.6
0.8
1
2014 2016 2018 2020
MPR 4/17 MPR 1/18
Factors behind changes in key policy rate forecast
25
Factors behind changes in key policy rate forecast since MPR 4/17. Percentage points
-1
-0.5
0
0.5
1
-1
-0.5
0
0.5
1
2018Q2 2018Q4 2019Q2 2019Q4 2020Q2 2020Q4
Foreign factors Money market premium Change in inflation target
Source: Norges Bank
Oil futures prices little changed
26
Oil price. Brent blend. USD/barrel
Sources: Thomson Reuters and Norges Bank
0
20
40
60
80
100
120
140
0
20
40
60
80
100
120
140
2012 2014 2016 2018 2020
Spot price
Futures prices MPR 1/18
Futures prices MPR 4/17
Krone exchange rate broadly as projected
0.4
0.6
0.8
1
1.2
0.4
0.6
0.8
1
1.2
Jan-17 Apr-17 Jul-17 Oct-17 Jan-18
10 years1 year5 years
27
Import-weighted exchange rate index (I-44) Interest rate differential.1) Percentage points
1) Differential based on swap rates between Norway and aggregate for trading partners Sources: Bloomberg and Norges Bank
100
102
104
106
108
110
112
100
102
104
106
108
110
112Jan-17 Apr-17 Jul-17 Oct-17 Jan-18
Projections 2018Q1 MPR 4/17
Factors behind changes in key policy rate forecast
28
Factors behind changes in key policy rate forecast since MPR 4/17. Percentage points
-1
-0.5
0
0.5
1
-1
-0.5
0
0.5
1
2018Q2 2018Q4 2019Q2 2019Q4 2020Q2 2020Q4
Exchange rate Foreign factors
Money market premium Change in inflation target
Source: Norges Bank
Higher growth in the Norwegian economy
29
Output growth Regional Network. Reported and expected growth. Annualised. Percent
Source: Norges Bank
-1
0
1
2
3
4
5
-1
0
1
2
3
4
5
Total Manufacturing(16%)
Oil services(10%)
Construction(12%)
Retail trade(16%)
Services(46%)
November 2017 - past three months January 2018 - past three months
January 2018 - next six months
Higher consumption growth in 2018
30
Consumer confidence. Net values Household consumption. Annual
change. Percent
Sources: Kantar TNS, Opinion, Statistics Norway and Norges Bank
0
1
2
3
4
0
1
2
3
4
2012 2014 2016 2018 2020
MPR 1/18
-30
-20
-10
0
10
20
30
40
50
-15
-10
-5
0
5
10
15
20
25
2012 2014 2016 2018
Consumer confidence index (l.h.s)
Kantar TNS trend indicator (r.h.s.)
Higher mainland exports
31
Annual change. Percent
Sources: Statistics Norway, Thomson Reuters and Norges Bank
-8
-6
-4
-2
0
2
4
6
8
-8
-6
-4
-2
0
2
4
6
8
2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
Exports from mainland Norway
MPR 1/18
Imports for Norway’s trading partners
MPR 1/18
Higher business investment
32
Investment as a share of mainland GDP. Seasonally adjusted. Percent
4
6
8
10
12
14
4
6
8
10
12
14
2005 2007 2009 2011 2013 2015 2017 2019 2021
Petroleum investment
Business investment mainland
Sources: Statistics Norway and Norges Bank
Lower housing investment
33
Four-quarter change. Percent
Sources: Eiendomsverdi,Finn.no and Real Estate Norway, Statistics Norway and Norges Bank
-10
-5
0
5
10
15
-10
-5
0
5
10
15
2014 2015 2016 2017 2018 2019 2020 2021
Housing investment MPR 1/18House pricesMPR 1/18
Higher growth in 2018, slowing further ahead
34
Mainland GDP. Annual change. Percent
Sources: Statistics Norway and Norges Bank
0
1
2
3
4
0
1
2
3
4
2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
MPR 4/17 MPR 1/18
Factors behind changes in key policy rate forecast
35
Factors behind changes in key policy rate forecast since MPR 4/17. Percentage points
-1
-0.5
0
0.5
1
-1
-0.5
0
0.5
1
2018Q2 2018Q4 2019Q2 2019Q4 2020Q2 2020Q4
Domestic demand Exchange rate Foreign factors
Money market premium Change in inflation target
Source: Norges Bank
Inflation somewhat lower than projected
36
Twelve-month change. Percent. January 2012 – February 20181)
0
1
2
3
4
5
0
1
2
3
4
5
2012 2013 2014 2015 2016 2017 2018
CPICPI-ATEMPR 4/17MPR 1/18
1) Projections for 2018 Q1 – 2021 Q4. Sources: Statistics Norway and Norges Bank
Higher wage growth prospects
37
Nominal wages. Annual change. Percent
0
1
2
3
4
5
6
0
1
2
3
4
5
6
2012 2014 2016 2018 2020
MPR 1/18 MPR 4/17
Sources: Statistics Norway and Norges Bank
Factors behind changes in key policy rate forecast
38
Factors behind changes in key policy rate forecast since MPR 4/17. Percentage points
-1
-0.5
0
0.5
1
-1
-0.5
0
0.5
1
2018Q2 2018Q4 2019Q2 2019Q4 2020Q2 2020Q4
Domestic demand Exchange rate Prices and wages
Foreign factors Money market premium Change in inflation target
Source: Norges Bank
Household debt has risen substantially
39
Household bank deposits and debt. Share of disposable income excluding dividends. Percent
Sources: Statistics Norway and Norges Bank
0
50
100
150
200
250
0
50
100
150
200
250
1980 1985 1990 1995 2000 2005 2010 2015
Household debt Houshold bank deposits
Household behaviour uncertain ahead
40
Effect of a 1 percentage point increase in lending and deposit rates on disposable income excluding dividends. Percent
Sources: Statistics Norway and Norges Bank
-2
-1.5
-1
-0.5
0
0.5
1
-2
-1.5
-1
-0.5
0
0.5
1
1980 1986 1992 1998 2004 2010 2016
Interest expenses
Interest income
Net effect on disposable income
Factors behind changes in key policy rate forecast
41
Factors behind changes in key policy rate forecast since MPR 4/17. Percentage points
-1
-0.5
0
0.5
1
-1
-0.5
0
0.5
1
2018Q2 2018Q4 2019Q2 2019Q4 2020Q2 2020Q4
Domestic demand Exchange rate Prices and wagesForeign factors Money market premium JudgementChange in inflation target
Source: Norges Bank
Change in key policy rate forecast
42
Factors behind changes in key policy rate forecast since MPR 4/17. Percentage points
-1
-0.5
0
0.5
1
-1
-0.5
0
0.5
1
2018Q2 2018Q4 2019Q2 2019Q4 2020Q2 2020Q4
Domestic demand Exchange ratePrices and wages Foreign factorsMoney market premium JudgementChange in inflation target Change in key policy rate forecast
Source: Norges Bank
Overall picture
-1
0
1
2
3
-1
0
1
2
3
2012 2014 2016 2018 2020
43
-3-2-1012
-3-2-1012
2012 2014 2016 2018 2020
0
1
2
3
4
0
1
2
3
4
2012 2014 2016 2018 2020859095100105110
859095
100105110
2012 2014 2016 2018 2020
Output gap Key policy rate
CPI-ATE Exchange rate (I-44)
MPR 1/18 MPR 4/17
MONETARY POLICY REPORT 1/18
PÅL B. ULVEDAL ECON4325 – MONETARY POLICY (UIO)
22 MARCH 2018
