Norges Bank Announcement Lifts Krone

September 23, 2009

Norway’s central bank left its deposit rate point target at 1.25% within a 0.75 – 1.75% range as expected.  This was the same result as the previous meeting on August 12, representing a bottom after seven rate reductions totaling 450 basis points from 5.75% prior to mid-October 2008 and 1.25% after a 25-bp cut this past June 17th.  The body of the central bank’s statement today is balanced but dovish on balance, warning of continuing downside risks that will likely keep growth low for a “fairly long time” and projecting sub-target inflation for the coming year.  Officials do reiterate that unemployment is not as high as feared earlier and notes that Norway on the whole has weathered the global financial storm.

While calling 1.25% an appropriate policy stance now, officials took a step closer to their first rate hike, acknowledging that “the Executive Board considered the alternative of increasing the policy rate at today’s meeting.”  Analysts were not entirely surprised by this move, although it more clearly puts the Norges Bank in the first wave of central banks that are likely to raise rates.  The Fed and Norges Bank may be on the same schedule, meeting on August 12 and September 23, but are at far different points in terms of the signals they are sending about how 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 most central banks are still either cutting rates or in a prolonged pause mode, Norwegian monetary policy made a two-step change last month from a downward trend to a stability with a tightening bias.  This was done in spite of low inflation and a krone, which continues to strengthen.  Officials have now formalized the choice of either keeping a 1.25% deposit rate or lifting it, which will be addressed no doubt again at future meetings set for October 28, December 16, February 3, and March 24th.  Full economic assessments will be made next month and in March.

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


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