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This is a big week for central banking! While the Federal Reserve pencilling in some rate cuts in 2024 has naturally hogged attention, Norway’s central bank decided to go a little rogue.
The direction of travel for global monetary policy is clear. In addition to the Fed’s pivot, the Swiss National Bank, the European Central Bank, the Bank of England and the Central Bank of the Philippines have all held steady today. Mexico’s central bank is expected also stay on hold later today and the Central Bank of Brazil already cut rates yesterday.
Someone didn’t get the memo though:
Norway’s central bank bucked the global trend by increasing its interest rate and insisting it would remain at a high level “for some time ahead”.
Norges Bank on Thursday raised its main rate by 0.25 percentage points to 4.5 per cent, citing persistently high inflation.
“We see that the economy is cooling down, but inflation is still too high. An enhance in the policy rate now reduces the risk of inflation remaining high for a long period of time. The policy rate will likely be kept at 4.5 per cent for some time ahead,” said governor Ida Wolden Bache.
The rate enhance caused the krone to rise by 2 per cent against the euro on Friday morning as economists described Norges Bank as “hawkish”.
Here you can see the Nokkie jump sharply, reflecting just how unexpected this proceed was.
Why were markets and economists caught so unaware, given that Norges Bank’s rate path suggested that this was probable?
Because at its last meeting in November the central bank said that “if the Committee becomes more assured that underlying inflation is on the reject, the policy rate may be kept on hold”. And since then pretty much all the data has been on the weak side.
Most notably, core inflation has cooled quicker than Norges Bank previously forecast (although it remains uncomfortably hot at 5.8 per cent, and the headline rate edged up to 4.8 per cent in November due to higher energy prices).
JPMorgan’s Scandi economist Morten Lund reckons that there was really just one major reason for why Norges Bank decided to cut against the global grain. Alphaville’s emphasis below:
The Committee argued that “we see that the economy is cooling down, but inflation is still too high. An enhance in the policy rate now reduces the risk of inflation remaining high for a long period of time”. Digging into the details, however, there appeared to be only one reason for the hike: the NOK. Thus, this was the only hawkish factor in the rate path, and the contribution was significantly larger than a normal govern of thumb would suggest. In other words, Norges Bank appeared to have bent its normally credible model framework to a large degree.
The first answer at the press conference was striking. When asked about whether the NOK was the reason for the hike, the Governor responded that the Committee had noticed that no hike was expected, and therefore they would expect a krone appreciation with the decision. Although the Governor followed up with usual remarks about Norges Bank not having a target for the NOK — and later on said that “we don’t have a goal about surprising markets”— it seemed clear that shocking the markets was indeed a significant (if not the only) reason for the decision.
Every country suffers its fair share of silly psychodrama around the strength or weakness of its currency (hello, sterling!), but the feebleness of the Norwegian krone has become a major talking point in Norway over the past year.
Some of it is for good reasons. Norway is a small open economy where a weaker krone immediately increases prices on a range of goods domestically. But lately it has gotten wrapped up into a bout of vague political angst about the country’s direction, and often used as a cudgel against [insert policy].
A better-supported Nokkie would therefore both help curb inflation quickly, but also dampen some of the ongoing Norwegian moaning about the cost of holidaying abroad (Norway really is the state manifestation of the first-world problems meme).
That said, Lund unsubtly suggests that this was bad for Norges Bank’s credibility:
Today’s outcome was very hawkish, and to us (and markets), very surprising. The Committee will likely argue that the decision shows its full commitment to the (flexible) inflation target, while investors might argue that it was at the expense of the credibility of the normally well-defined model framework . . . With the hike today Norges Bank appears likely to be both the first and last in DM to hike rates in this cycle.
Maybe? But analysts often whisper darkly about central bank credibility whenever they cruelly do something they didn’t forecast. And while central banks probably shouldn’t actively try to shock markets, the odd jolt here and there would arguably be healthy in the long run.
The stronger argument for Norges Bank acting a bit more cautiously is how wildly leveraged Norwegian households are, and the structure of that debt.
According to the OECD, Norway’s household debt is the highest in the world relative to disposable incomes (NB the ratio dipped slightly to 244 per cent in 2022 according to the latest IMF report).
And given that the vast majority of Norwegian mortgages are floating-rate, there aren’t any of the famous long and variable lags: rate increases hit hard and they hit quick.
So while the supporting the krone is all well and good, currencies tend to find their appropriate level anyway in the long run. It would be a weird look to try to artificially boost the krone at the cost of trashing the domestic economy.
Full disclosure: The author has a massive floating-rate Norwegian mortgage [you’re NORWEGIAN??? Why do you never mention this?? – Ed]. Thankfully, journalism is a hugely lucrative industry.
