Further Norwegian Monetary Tightening Delayed

June 23, 2010

The policy interest rate of the Norges Bank was kept at 2.0%, and a released statement from the Executive Board of the central bank expressed the view that the rate “should be held at the current level for a period and then gradually raised towards a more normal level.”  A range of 1.5-2.5% was projected for the target between now and very late October.  Analysts had been divided in their predictions of today’s decision.  A pause now after increases of 25 bps each last October, December and May 5 is justified by the potential drag on Norway’s economy from regional financial market turmoil and the simultaneous fiscal tightening by many governments in the region that the crisis is eliciting.  Indeed, officials released a more subdued economic outlook for Norway.  Core consumer price inflation is now about 2% and headed lower in the second half of this year.  Total inflation is at 2.5%.

In other papers accompanying today’s decision can be found a table that quantifies the amount of proposed fiscal restraint from several other governments in Europe.  As a percent of GDP, such over 2010-11 amounts to 11.5% in Greece, 5.0% in Spain, 3.3% in Portugal, 3.0% in the Netherlands, almost 2% in France and Italy, and 1.5% in Denmark.  British fiscal austerity will amount to 9% by 2015, and Germany plans to tighten by 0.4% per annum in 2011-16. 

During the world recession, the Norges Bank implemented two rate cuts of 50 basis points apiece in October 2008, which were followed by five more reductions of 175 bps in December 2008, 50 bps in February 2009, 50 bps in March, and 25 bps in both May and June.  In the process, the policy rate dropped from a cyclical high of 5.75% to a low of 1.25%, and that trough was maintained for four months.  Norway, an exporter of oil, benefited from the rebound in commodity prices and was the first European nation to lift rates since the recession ended.

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



Comments are closed.