Norway Has Europe's First Central Bank Rate Hike

October 28, 2009

As expected and foreshadowed at the previous policy meeting of the Norges Bank, the key policy rate was increased by 25 basis points to 1.50%, and progress was noted on the unwinding of unconventional supplements to money market liquidity.  A statement released by Norwegian monetary authorities speaks of a faster-than-assumed revival of economic activity, core inflation ear 2.5% that is slightly higher than forecast, and significantly less unemployment than had been feared.  Today’s rate hike was made in spite of a 3.3% trade-weighted krone appreciation since last month’s meeting, and officials indicated that the key rate may be raised to as high as 2.25% by next March.  The Norges Bank becomes the third central bank after the Bank of Israel and Reserve Bank of Australia to lift rates following an extensive reduction of them.  Starting with a 50-bp cut on October 15, 2008 and ending with a 25-bp cut on June 17, 2009, seven reductions totaling 450 basis points and including a mega-175 basis point move on December 17 had been implemented.  Norwegian GDP in the second quarter was still 4.8% lower than in 2Q08.

As an oil exporter, Norway has special circumstances.  So did Australia, which has a commodity-intensive economy and close trading ties with the rapidly growing Chinese economy.  The turn in the monetary policy cycles in these two countries does not mean that many other countries, including the Fed, ECB, Bank of England, or Bank of Japan, are about to follow suit.  Nonetheless, the policy reversals in Norway and Australia are in-your-face market reminders that ultra-easy policies are impermanent everywhere and may get reversed aggressively after the emergency has passed.  It remains to be seen if it will be possible to reverse gears as quickly as promised.  The rally in stock markets since March had more to do with excessive liquidity looking for a parking place than with optimism about the strength of the eventual economic upswing.  If the onset of widespread monetary policy tightening causes stock markets to relinquish extensive portions of their post-March gains, the recovery itself could be jeopardized, and that may put plans to raise rates back on hold.  Such reasoning may sound circular, but it’s exactly what has happened repeatedly in Japan for more than a decade.

Copyright Larry Greenberg 2009.  All rights reserved.  No secondary distribution without express permission.

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