The Central Bank of Norway decided Wednesday to keep its key policy rate at 2%, as expected by most analysts. The Central Bank have also suspended its earlier projections for future rate hikes due to renewed uncertainty about the global – and in particular the European – economy. Yesterday’s labor market report showed a much sharper increase in unemployment than expected. Actually, no one seems to have a clue about what’s going on in our economy right now.
“New information may reveal aspects of economic developments that suggest the Norwegian economy is following a different path than projected.”
“The moderate recovery in the Norwegian economy is continuing, and inflation has moved broadly in line with projections. However, the turmoil in global financial markets is creating uncertainty with regard to economic developments. This suggests that the interest rate should be kept unchanged for a period and that the further increase will occur later than previously envisaged”, Deputy Governor Jan F. Qvigstad at Norges Bank says.
“The outlook for Europe is uncertain. Many countries are compelled to implement substantial fiscal tightening. This will dampen economic activity and may have an impact on other countries, both within and outside Europe. The projections in Monetary Policy Report 2/10, presented today, are based on the assumption that the turmoil in financial markets will gradually pass. Interest rates abroad are nonetheless expected to remain low for a fairly long period”, Qvigstad adds.
The Executive Board’s strategy is that the key policy rate should be in the interval 1½–2½ per cent in the period to the publication of the next Monetary Policy Report on 27 October unless the Norwegian economy is exposed to new major shocks, the Norwegian Central Bank writes in its statement.
A Major Mistake?
The Central Bank of Norway was the first in Europe (and the second in the world) to rise interest rates again after the 2008 financial turbulence.
Since October 2009, Norges Bank has raised the key policy rate by a total of 0,75 percentage point to 2%, against some screaming economists advice.
And there are now in fact some signs that might suggest the central bank have been relatively overoptimistic in its earlier projections of the development and recovery of the Norwegian economy.
Here’s what the central bank writes in their Monetary Policy Report 2/10, released today:
“The recovery in the Norwegian economy is continuing, albeit at a somewhat slower pace than envisaged in March. Underlying inflation is now around 2% and is expected to slow further towards the turn of the year. Lower interest rates abroad and a weaker outlook for Europe, higher money market premiums in Norway, somewhat lower growth in the Norwegian economy ahead and slightly lower wage growth suggest that the key policy rate should be raised somewhat later than projected in the March Monetary Policy Report.”
Well, it’s better than saying; “we screwed up.”
The Rate Must Go Up (At Some Point… )
“The risk of a prolonged period of turbulence in financial markets, resulting in a weakened outlook for inflation, output and employment in the Norwegian economy, suggests that the increase in the key policy rate should be postponed. On the other hand, interest rates in Norway are low. The consideration of guarding against the risk of future financial imbalances that may disturb activity and inflation somewhat further ahead suggests that the interest rate should be brought closer to a more normal level,” the central bankers writes.
Translation: “We think it’s best to keep the interest rate low for a while. We have no idea for how long, and it might just make things worse.”
However, The Central Bank of Norway admit to the unusual uncertainty related to the global economy:
“The projections are uncertain. New information may reveal aspects of economic developments that suggest the Norwegian economy is following a different path than projected. If the financial market turbulence should rapidly abate, economic activity, in Norway and abroad, may increase more sharply than projected in this Report and result in higher inflation. Higher capacity utilization or lower productivity growth may also push up inflation more rapidly than currently projected. On the other hand, inflation may be lower if global developments prove to be substantially weaker than projected or the krone appreciates markedly.”
“Monetary policy cannot fine-tune developments in the economy, but it can mitigate the most severe effects when the economy is exposed to shocks. On balance, the outlook and the balance of risks suggest that the key policy rate should be held at the current level for a period and then be raised gradually towards a more normal level.”
A more “normal level” is, according to the Norwegian central bank about 4 – 5 percent.
The interesting question here is; what happens if the central bank discover that the old definition of “normal” have been replaced with a new “normal.”
This is the new projections for the Norwegian key policy rate:
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