Thursday, December 16, 2021

Norway raises rate 2nd time, hikes countercyclical buffer

     Norway's central bank lived up to its guidance and raised its benchmark interest rate for the second time this year and said it would most likely raise the rate again in March next year as it continues to unwind the expansionary monetary policy and move the rate back to a more normal level.
     However,  Norges Bank's monetary policy and financial stability committee also said there was "considerable uncertainty about the evolution of the pandemic and its effects on the economy" and if there is a need for more stringent and protracted containment measures the lower economic activity, further rate hikes may be postponed.
      On the other hand, if there are signs of persistently high inflation from higher-than-expected domestic wages and prices from capacity constraints and global price pressures, NB said "the policy rate may be raised more quickly."
       NBs' policy committee unanimously raised the policy rate by 25 basis points to 0.50 percent and has now raised it half a percentage point this year following a rate hike in September, the bank's first rate hike since September 2019, and today.
       In addition to the rate hike, NB also raised banks' countercyclical capital buffer by 1 percentage point to 2.0 percent as of Dec. 31, 2022, saying the profitability of banks is solid, credit losses are low, and businesses and households have ample access to credit.
      "Based on the Committee's current assessment of economic developments and the prospects for bank losses and lending capacity, the buffer rate will be raised to 2.5 percent in the first half of 2022, taking effect one year later," NB's Governor, Oeystein Olsen said.
      In response to the outbreak of the COVID-19 pandemic early last year, NB cut its rate three times and by a total of 1.50 percentage points to 0.0 percent, and also slashed the countercyclical capital buffer by 1.5 percentage points to 1.0 percent to counter any tightening of banks' lending standards, which would amplify an economic downturn.


     Norges Bank released the following statements about its monetary policy decision and the countercyclical capital buffer:

"Policy rate raised to 0.5 percent

Norges Bank’s Monetary Policy and Financial Stability Committee has unanimously decided to raise the policy rate from 0.25 percent to 0.5 percent.

The upswing in the Norwegian economy has continued. Unemployment has fallen further, and capacity utilisation is estimated to be above a normal level. In recent weeks, the number of new cases and Covid-related hospitalisations have reached a new peak since the onset of the pandemic. Increased infection rates and extensive containment measures are expected to dampen activity in the near term. When infection rates subside further out and containment measures are eased, the economic upswing will likely continue. Higher electricity prices have resulted in elevated CPI inflation, but underlying inflation is lower than the inflation target. Rising wage growth and higher imported goods inflation is expected to push up underlying inflation ahead.

Monetary policy is expansionary. In the Committee’s assessment, the objective of stabilising inflation around the target somewhat further out suggests that the policy rate should be raised towards a more normal level. A gradual normalisation of the policy rate is consistent with continued high employment. Higher interest rates will also help to counter a build-up of financial imbalances.

In its discussion of the balance of risks, the Committee was concerned with the potential economic effects of the pandemic and containment measures in the period ahead. If there is a need for more stringent and protracted containment measures that pull down economic activity through spring next year, further rate hikes may be postponed. The Committee was also concerned with a potentially higher-than-projected rise in domestic wages and prices due to capacity constraints and persistent global price pressures. If there are prospects of persistently high inflation, the policy rate may be raised more quickly.

“There is considerable uncertainty about the evolution of the pandemic and its effects on the economy. But if economic developments evolve broadly in line with the projections, the policy rate will most likely be raised in March”, says Governor Øystein Olsen.

The policy rate forecast is little changed from the September 2021 Monetary Policy Report and indicates a gradual rise in the policy rate in the coming years."

"The countercyclical capital buffer will be raised to 2.0 percent

Norges Bank’s Monetary Policy and Financial Stability Committee has decided to raise the countercyclical capital buffer rate to 2.0 percent, effective from 31 December 2022.

The objective of the countercyclical capital buffer is to bolster banks’ resilience and to mitigate the amplifying effects of bank lending during downturns. Banks’ loss-absorbing capacity is fundamentally sound, and a higher countercyclical capital buffer rate will contribute to maintaining this capacity.

The upswing in the Norwegian economy has continued. Higher infection rates and extensive containment measures are expected to weigh on activity in the near term. When infection rates subside further out and containment measures are eased, the economic upswing will likely continue.

For Norwegian banks, profitability is solid and credit losses are low. A relatively small share of banks’ exposures is to industries that have been most directly affected by containment measures, limiting banks’ risk of losses. If there is a need for more protracted containment measures that can pull down economic activity, bank losses may rise.

Creditworthy businesses and households appear to have ample access to credit. Norwegian banks are well equipped to meet a higher countercyclical capital buffer rate while maintaining credit supply.

Prior to the reduction in March 2020, the countercyclical capital buffer rate was set at 2.5 percent against the background of a build-up of financial imbalances over a long period. During the pandemic, residential and commercial property prices have increased markedly, and household credit growth has accelerated. Over the past six months, property price inflation has been more moderate. The consideration of financial imbalances suggests a higher buffer rate.

“Based on the Committee’s current assessment of economic developments and the prospects for bank losses and lending capacity, the buffer rate will be raised to 2.5 percent in the first half of 2022, taking effect one year later”, says Governor Øystein Olsen."

     www.CentralBankNews.info



0 comments:

Post a Comment