Norwegian Central Bank: Rate Hike Likely Sooner Than Presumed Earlier
August 12, 2009
The Norges Bank cut its key policy rate three times in the fourth quarter of 2008 by 275 basis points and engineered four more reductions in 1H09 summing to another 175 bps. The aggressive easing from 5.75% to 1.25% in the space of eight months is reaping better and quicker results than monetary officials had been anticipating. The authorities did not reduce rates further after meeting today, which came as no surprise. However, the statement released today goes beyond what other central banks have done in broaching the likelihood and possible timing of an initial rate increase. The previous meeting of the Executive Board had ending with a final rate cut of 25 basis points in June and was a associated with a full review of the economy that suggested the ultra-easy policy stance would probably stay in place into next spring. Today’s offering says the economy has not performed as poorly as then assumed and says that rates will begin to rise sooner than thought back in June contingent upon the absence of new negative shocks. The key wording used today may serve as a blueprint for other central banks engineering the transition from promising very low rates to preparing markets for a hike and finally undertaking a rate increase:
It appears that output and employment in Norway may slow somewhat less sharply than expected. New figures may change the picture, but should these developments continue, it may be appropriate to increase the interest rate earlier than projected in the previous Monetary Policy Report.
Policymakers next meet on September 23rd. The next meeting with a full economic assessment on October 28th is the earliest realistic date for a rate increase. Subsequent policy meetings are scheduled for December 16, February 3, March 24 with another full review, May 5 and June 23rd with a full review. It’s one thing to guide market expectations about a coming rate increase. Finding the right moment to pull the rate hike trigger can be something altogether different. The Bank of Japan, which was first to experiment with quantitative easing has many times had to abort announced intentions to raise rates. Japan has been bedeviled with negative inflation, that is deflation. Norwegian consumer prices rose 3.4% in the year to June, the same advance as in the year to June 2008.
Copyright Larry Greenberg 2009. All rights reserved. No secondary distribution without express permission.
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[…] soon rates might begin to climb. The statement following the decision on August 12th (as explained in my review) took a giant step toward indicating a reversal of the Norges Bank’s rate bias. While […]