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Monday, July 22, 2024

Interest rates tied to the infection rate

Norway’s central bank (Norges Bank), worried about rising Corona infection rates, opted to keep its key policy rate at zero on Thursday. That prompted the country’s currency to lose even more of its recent strength, while the bank board thinks housing prices will rise even higher than earlier expected.

Norway’s krone lost more value after the country’s central bank confirmed it would be keeping interest rates extremely low. PHOTO:

The decision by the central bank’s Monetary Policy and Financial Stability Committee to keep the bank’s rate unchanged was widely expected, because of what the bank is now calling “a sharp downturn in the Norwegian economy.” The Corona pandemic seems to be firming its painful grip on Norwegian businesses, with more of them calling on the state for additional crisis aid as the economic outlook becomes increasingly poor.

There was an upturn before and during the summer, when Norwegians flocked back to restaurants, bars, shopping centers and even local hotels. That in turn has sent Corona infection rates rising, and that’s now boosting pessimism. Everyone fears stricter Corona containment measures. The travel, hotel and tourism industries are openly wondering how they’ll get through the winter, while demand for Norway’s biggest export products (oil and seafood) may slide.

‘Braking the upswing’
“The increase in infection rates may put a brake on the upswing in the coming period,” stated the bank’s committee that now stresses “financial stability.” The bank had slashed interest rates, from 1.5 percent to just 0.25 percent in March, when the Corona crisis first hit, and then down to zero percent because of the ongoing pandemic. Bank officials clearly feel it’s now necessary to maintain that historically low level for a while longer.

The committee further stated that “it will take time for output and employment to return to pre-pandemic levels.” Underlying inflation was described as “above the target,” but the strengthening of Norway’s currency, the krone, after record-weak levels last spring along with “prospects for low wage growth” suggest that inflation will moderate.

On Thursday, however, the krone weakened immediately on news of the decision to keep Norway’s policy rate at 0.0 percent and its overnight lending rate at just 1 percent. Last week it cost as low as NOK 8.73 to buy one US dollar. By Monday it cost just over NOK 9, on Tuesday more than NOK 9.3 and, after the bank’s announcement, nearly NOK 9.6.

‘Speeding a return to normal’
Norway’s low interest rates, however, were defended as a means of  contributing to “speeding up the return to more normal output and employment levels” and thereby reducing “the risk of unemployment becoming entrenched at a high level.” The committee conceded that a long period of low interest rates can also raise debt levels and “risk a build-up of financial imbalances.” That’s why some economists and analysts have thought the central bank may end up raising interest rates sooner than expected, not least to slow the growth of ever-rising housing prices. On Thursday the prognosis was for continued expansive policy for a few more years.

The central bank, meanwhile, now thinks housing prices will rise higher because of such low interest rates, predicting 3.7 percent growth this year and perhaps 5 percent next year. Zero interest rates and temporary suspension of some lending regulations through September may have stimulated the housing market more than expected, the bank stated, along with willingness for higher monthly payments because of the need to work from home during the pandemic and fewer options for otherwise spending money on such things as travel and entertainment.

Newspaper Dagens Næringsliv (DN) reported that several economists and analysts think the bank is being cautious and taking more of a “wait and see” attitude. That was reflected in Norges Bank Governor Øystein Olsen’s remark to sum up the situation: “The sharp economic downturn and considerable uncertainty around the outlook suggest keeping the policy rate on hold until there are clear signs that economic conditions are normalizing.” Berglund



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