A Third Rate Hike in Norway But the First of 2010

May 5, 2010

The Norges Bank implemented a third 25-basis point rise of its key central bank policy rate to 2.0%.  Analysts had been split over whether this would be done today, and officials released a statement that admitted that a decision to leave the rate at 1.75% had also been considered.  The previous rate increase was made on December 16, and the first one in what officials call a process of rate normalization happened last October 28.  During the world recession, the policy rate of the Norges Bank had been cut in seven steps from a peak of 5.75% at end-3Q08 to a low of 1.25% by end-June 2009.  The final reduction last June had been by 25 bps, after five of 50 basis points and one in December 2008 of 175 bps.  The next policy meeting in June 2010 is likely to keep the rate unchanged.  Action at a subsequent meeting in August will hinge on the evolution of the European debt crisis.

Monetary authorities are closely watching for contagion from the Greek debt crisis, warning that “developments in Europe may prove weaker than expected, which may also affect the outlook for the Norwegian economy.”  A collateral danger is that the krone, which is 11% firmer than a year ago against the euro, may continue to appreciate.  Core inflation is now hovering around 2.0%, below the 2.5% target and expected to trend lower in summer.  Capacity usage in Norway is lower than normal.  However, the jobless rate is only 3.0%, and house prices have rebounded 15.5% since bottoming in November 2008.  Consumption perked up last quarter, and core inflation is expected to begin building later in the forecast horizon.

Yesterday, Romania’s central bank eased, while Australia’s tightened.  Today, central bank rates went up in Norway, held steady in Indonesia, and fell in Iceland.  Monetary policymaking around the world is truly at a cusp, with some central banks still cutting rates, others beginning to lift them, and the majority between the two modes of easing and tightening.

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



Comments are closed.