Norway: Norges Bank leaves rate unchanged in December.
December 17, 2015
At its 16 December Rate Decision meeting, Norges Bank (NB) defied market expectations and adopted a surprisingly hawkish stance by maintaining the main policy rate at 0.75%. Given the unceasing decline in energy prices, and a steady fall in oil future contracts, markets had suspected that the NB might lower rates to 0.50% in its last meeting of the year in order to soften the impact the collapse of the energy sector might have on the Norwegian economy. However, NB deemed that monetary policy was sufficiently expansionary at present and that risks associated with a rate cut, including a rise in real-estate prices and debt, did not warrant such an action.
Internationally, weaker growth in emerging markets is dragging on the many advanced economies’ export sectors. Closer to home, however, the Eurozone’s recovery remains steady and is propped up by accommodative monetary policy. Recent migrant flows into Europe and Norway will have an impact on the economy, although it is difficult to quantify at this early stage exactly what the effect will be. The NB noted that such an influx could provide a boost to the economy, stating that, “in today’s situation with weak growth in the Norwegian economy, the large inflows of asylum-seekers may contribute to curbing the decline in capacity utilization.” However, this is somewhat conditional on how quickly and effectively such migrants are integrated into the labor market.
Oil prices breached the USD 11–dollar-per-barrel mark in December, after falling steadily though the second half of the year. Moreover, OPEC looks determined to maintain its policy of near-capacity production in order to drive down prices and edge out competitors. This has had a devastating effect on investment in the country’s substantial energy sector. NB believes that this effect has metastasized to other parts of the economy that had until recently managed to grow steadily. This has resulted in somewhat weaker growth expectations for the overall economy.
Although such developments might otherwise call for looser monetary policy, NB noted that headline inflation has evolved in line with the expectations laid out in September’s report. Since September’s rate cut, the krone’s value has fallen and this has helped to spur inflation via higher costs for imported goods. The Bank also noted that household debt had grown faster than household income in autumn. Such factors may be exacerbated by a further policy rate cut and likely were an influential factor in the NB’s decision to hold its policy rate at 0.75%.
In its Executive Board Assessment, the NB indicated that there was potential for a decrease in the policy rate in the first half of 2016. Although the recently-released parliamentary budget calls for increased government spending in 2016, a more accommodative stance by the Bank may be required if key indicators such as unemployment, investment and consumption are weaker than expected. However, at present, the Bank concluded that, “a lower key policy rate may increase the risk of a more rapid rise in real estate prices and debt,” and that, “uncertainty as to the effects of the monetary policy stance suggests a cautious approach to interest rate setting.” The next policy meeting is scheduled for 17 March 2016.
Author: Robert Hill, Economist