Thursday, March 15, 2018

Norway maintains rate but pulls forward hike to autumn

      Norway's central bank kept its key policy rate at 0.50 percent but pulled forward the expected time for tightening its policy stance to this autumn as economic growth is now seen faster than previously expected while inflation this year is seen topping the bank's new 2.0 percent target.
      "Monetary policy is expansionary. The outlook for the Norwegian economy suggests that it will soon be appropriate to raise the key policy rate," said Oeystein Olsen, governor of Norges Bank (NB), adding the key policy rate "will most likely be raised after summer 2018."
      In its March quarterly monetary policy report, the NB, which has maintained its rate at the current level since cutting it in March 2016, expects its policy rate to average 0.6 percent this year, up from 0.5 percent forecast in the previous monetary policy report from December.
       For 2019 the policy rate is seen averaging 1.1 percent, up from 0.9 percent, and for 2020 the policy rate is seen averaging 1.5 percent, up from 1.4 percent, and then reaching 2.0 percent in 2021.
       NB's executive board is next scheduled to meet in May, then June, August and September, with the quarterly monetary policy report updated in May and September.
      "There are prospects that growth in the Norwegian economy will be higher in 2018 than in 2017," Olsen said, adding the output gap will probably close earlier than assumed.
       In its two previous policy reports, NB also pulled forward its expected date for raising its key policy rate, with the December report laying out a rate path that implied an increase at the end of 2018 or early 2019.
       Overall, the central bank's executive board said the risks to its outlook were balanced.
       The economy is benefitting from improved domestic and foreign demand, with higher oil prices helping boost investment in its petroleum industry and solid global growth also helping to an upswing exports.
       On the other hand, the central bank said housing investment has fallen faster than expected and likely to fall further and cautioned that "there is a risk of growing protectionism, which over time may weigh on growth."
       The forecast for 2018 economic growth in the Norwegian mainland was raised by 0.3 percentage points to 2.6 percent but then lowered by 0.2 points in 2019 to 2.0 percent.
       Last year the economy grew by 1.8 percent.
       Norway's inflation rate in February rose to 2.2 percent from 1.6 percent in January, above the bank's new target of 2.0 percent, and NB raised its 2018 forecast to 2.1 percent from 1.9 percent.
       But in 2019 inflation is seen averaging only 1.7 percent and then 1.8 percent in 2020 before hitting 2.0 percent in 2021.
       On March 2 Norway's government lowered its inflation target to 2.0 percent from the 2.5 percent target that had been in place for 17 years. This put Norway in the same camp as most other developed economies, such as the U.S., the ECB, the U.K. and Sweden.
        NB's already said this new target wouldn't result in any significant changes in its conduct of monetary policy and echoed this conclusion today, adding its targeting regime is flexible and weight is also given to output and employment.
        A special feature in the monetary policy report looks closer at the effect of this new target.
       The immediate implication of a lower inflation target is some monetary tightening, which is likely to strengthen the krone's exchange rate, curb inflation expectations and inflation.
       "After a period, the nominal interest rate will have to be reduced to prevent the real interest rate from becoming too high," the report says, adding in the long term inflation and the nominal interest rate will fall by half a percentage point.
       Norway's krone, which typically mirrors movements in crude oil prices, has been rising in recent months and was trading at 7.70 to the U.S. dollar today, up 6.5 percent this year.

       Norges Bank issued the following statement:
"On 2 March, the Government laid down a new Regulation on Monetary Policy. The inflation target is now 2 percent, compared with the previous 2.5 percent. The new regulation will not result in significant changes in the conduct of monetary policy. The inflation targeting regime is flexible, and weight is given to developments in output and employment. A lower numerical target in and of itself is of little importance for the interest rate outlook in the coming period.
The upturn abroad and in Norway is continuing. Economic growth appears to be somewhat stronger than expected, and the output gap for Norway is closing. Underlying inflation is low, but rising capacity utilisation will probably push up price and wage inflation further out.
Monetary policy is expansionary. The outlook for the Norwegian economy suggests that it will soon be appropriate to raise the key policy rate. The uncertainty surrounding the effects of a higher interest rate suggests a cautious approach. Overall, the changes in the outlook and the balance of risks imply a somewhat earlier interest rate increase than in the December 2017 Monetary Policy Report.
"The Executive Board's current assessment of the outlook and balance of risks suggests that the key policy rate will most likely be raised after summer 2018", says Governor Øystein Olsen."


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