Have Norway's Central Bank Lost Touch With Reality?

According to the original plan from last year, the Norwegian key policy rate should now be 2,5%. But over the last months the Central Bank of Norway have been forced to freeze the rate amid growing uncertainties about the economic developments in both Norway and abroad. Some economist suggest that the central bank will have to lower the policy rate again, but at the moment that is out of the question as Norges Bank keeps holding on to its optimistic outlook.

“Recent developments in the Norwegian economy have been broadly in line with expectations. Activity is rising moderately. Inflation has slowed and is now below 2%.”

Svein Gjedrem

“Recent developments in the Norwegian economy have been broadly in line with expectations. Activity is rising moderately. Inflation has slowed and is now below 2 per cent,” Governor Svein Gjedrem at Central Bank of Norway says in a statement after the decision to keep the policy rate unchanged for a while longer.

According to the board of directors at Norges Bank, the global economic growth has been slightly stronger than expected, but the level of activity is still low in advanced economies.

Governor Svein Gjedrem. Central Bank of Norway.


“Turbulence related to public finances in several European countries has receded,” they say in the press release, adding;  “but the outlook for the US economy is somewhat more uncertain.”

“Considerations relating to both inflation and stable developments in output and employment imply that the interest rate should be kept 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 gradually brought closer to a more normal level,” Governor Svein Gjedrem concludes.


Too Optimistic?

Several economists have pointed out that the central bank’s perception of the global economy is just plain wrong.

“There’s one thing I really disagree with; that the Central Bank emphasizes that the global economy is stronger than expected,” says macro economist Shakeb Syed at Handelsbanken to the website DN.no.

He points to statement were the bank writes:  “The growth in the global economy appears to have been somewhat stronger than expected, but the level of activity in industrial countries is still low.”

“You might find a few bright spots in Germany and Britain, but two birds do not make a summer,” Mr. Syed  underlines.

OUTDATED: For some reason, Central Bank of Norway are not taking the lastest downward revisions into account.

Here’s few more optimistic statements from the Norwegian central bankers:

* Growth in world trade and global manufacturing output has slowed somewhat, but overall activity has picked up somewhat faster than expected earlier this year, particularly in some European countries. Growth in emerging market economies is still strong.

* The IMF revised up its global growth forecasts for 2010 from 4.2 per cent in April to 4.6 per cent in July and maintained its growth forecast of 4.3 per cent for 2011.

* Underlying consumer price inflation is low in the euro area and the US. Inflation expectations are still stable in most advanced countries.

* The differential between German and Greek 10-year government bond yields is approximately unchanged at 7.6 percentage points. For Spain and Portugal the differential has narrowed by up to 0.6 percentage point to 1.5 and 2.5 percentage points, respectively. Greece, Spain, Italy and Portugal have conducted successful auctions of government bonds in the market.

* On 23 July, the results of the stress tests on European banks were published. Seven of 91 banks did not satisfy the capital requirements. The tests have reduced the uncertainty surrounding the financial position of the banks.

Here’s a copy of the full statement from the Central Bank of Norway.

(And some nice, good looking, charts to go with it).

Nothing Is Fixed

However Shakeb Syed says that the signs of growth seen in the euro zone lately is just temporary.

Chief economist Shakeb Syed. Handelsbanken ASA.

“I think that overall the picture is pretty dark. Remember that the focus in the euro zone is aimed at cutting budgets –  that is not growth inducing,” he explains.

He points out that there is the same focus in the US, and that you don’t find many good figures there, either.

“I believe in a catch-up in the longer perspective. Throughout the summer we’ve had some pretty okay numbers, but I don’t think were getting such good numbers going forward. I think we get figures showing that growth is very weak,” the Norwegian  macro economist says.

Many of the euro pessimists have been pointing out that the rise in the euro zone is just a flicker, and that none of the issues that dominated Europe in the spring has been resolved.

Shakeb Syed agree.

“There is nothing that is fixed,” he says.

“This only strengthens the belief that interest rates will be ultra low for some time, not only in the US but also in Norway,” he concludes.

The Ghost of Ricardo

In the latest forecast by Norges Bank they estimate a 50% chance of a rate hike in December, and a 50% chance that the increase will come in January next year.

The reason for this uncertainty is (of course) those damn consumers who just won’t behave as expected according to the traditional Keynesian economic theories.

Economist David Ricardo


Instead they seem to have started saving the extra money they get through low interest rates and various stimulus measures.

Almost like described in the 200 years old economic theories of David Ricardo. A theory usually dismissed because of its lack of empirical studies, and the fact that it presupposes a rational behavior amongst people.

But the fact is that the Norwegian consumption has virtually stagnated in recent months, and at times have been far below the projections of Central Bank of Norway.

During last monetary policy report in June,  the central bank had to take down the consumption estimates sharply.


Meanwhile – I’m waiting for the revelation….



Related by the Econotwist:

Norway’s Foggy Outlook

Norway At The End Of An Era

Goodbye Keynes – Hello Ricardo!

The US FED Launch The QE2 – Beta Version

USA Could Be Forced Into Another Trillion Dollar Bank Rescue

Helicopter Ben; Cleared For Take Off

Wolfgang Münchau: A Cynically Calibrated Test To Fix The Result

Financial Authorities See No Point In Stress Testing Norwegian Banks

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Filed under International Econnomic Politics, National Economic Politics

2 responses to “Have Norway's Central Bank Lost Touch With Reality?

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