Norwegian Monetary Policy Left Unchanged

March 24, 2010

The key policy rate of the Norges Bank, which was raised 25 basis points each last October and December but not at last month’s meeting, was again kept at 1.75%. Most analysts expected no change.  This week’s policy meeting coincided with a new monetary policy assessment, and it is more dovish than the last one.  Norwegian GDP from mainland activities, that is minus offshore oil, grew just 0.3% last quarter, less than officials had anticipated.  Wage growth and capacity utilization in Norway likewise have been below what central bank officials previously assumed, all of which implies that inflation may similarly track in the future below the assumption that justified the two rate hikes in late 2009.  A statement from the Norges Bank observes that analysts expect the Fed and European central banks to begin raising rates later than had been assumed a while ago, that is closer to end-2010 than the middle of this year.  These revised expectations have created more attractive interest rate differentials favoring Norway, putting more upward pressure on the krone than desired and resulting in the currency being 1.9% higher this quarter on a trade-weighted basis than what officials had expected. Further Norwegian rate hikes now could subject the krone to even more unwelcome upward pressure.  Core inflation was at 2.1% last month, and factory output in November-January was no different from in the prior three months.  While the baseline forecast still embodies a gradual further increase of Norwegian interest rates, this new report puts the trajectory below the path suggested in the prior assessment.  Reading between the lines, officials seem to regret at least one, if not both, tightenings made last autumn.  At the time, much was made of Norway being the first European central bank to raise rates and that the moves were a harbinger of increases soon in Sweden.  The Swedish currency has also been well-bid, and the Riksbank has not yet implemented its first policy interest rate increase.

Over the course of eight months from mid-October 2008, the Norges Bank had slashed rates aggressively, cutting them twice by a total of 100 bps in October, once by 175 bps in December, by 50 bps each in February, March and May of 2009 and by 25 bps in June 2009.  At 1.75%, the key rate is still 400 basis points below the previous cyclical peak.  Norwegian GDP ended 2009 1.2% lower than its end-2008 level.

Copyright Larry Greenberg 2010.  All rights reserved.  No secondary distribution without express permission.

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