Tuesday, 3 September 2013

Base Money in Norway Surges in July

Base money for Norway jumped to NOK 104.649 billion in July, the highest since January 2012, according to figures released Monday from Statistics Norway. This represented a NOK 18.256 billion (21.1%) increase on June and an increase on July last year of 12.4%. Base money is still more than 37% lower than its peak from July 2009 when it hit NOK 167.428 billion and "only" 6.2% higher than in July 2008. I say "only" as this is peanuts compared to the massive increases in the base money orchestrated by the Bank of England and the Federal Reserve.

As a central bank increases the monetary base (base money) through buying assets in the market (e.g. government bonds), the surge in the monetary base for the month could very well be reflective of an attempt by Norges Bank (Norway's central bank) to limit the significant increase in Norwegian government bond yields. As an increase in bond yields (ceteris paribus) could lead to an increase in the value of the Norwegian krone (NOK), Norges Bank could use its 2.5% CPI policy target as a reason (more of an excuse if you ask me) to reduce bond yields as a stronger krone could push the CPI below target (due to cheaper imports). From 1st April this year to 3rd September, the 10-year government bond yield increased from 2.044% to 3.143%, an increase of almost 110 basis points or 53.77% (see here). If that is indeed the reason for the increase in base money in July then a further increase could reasonably be expected in August as the 10-year yield increased 44 basis during the month. Perhaps the next Monetary Policy Report to be published on 19 September will shed some light on this.

The M1 money supply declined from previous month, but increased at an annualised pace of 29.3% during the last three months. Compared to the same month last year, M1 money supply in July increased 4.1%, the highest growth rate reported since November last year. The average year on year (YoY) growth rate so far in 2013 of 2.7% is however the lowest since 2010 when it averaged 2.1%.

The YoY growth rate for M2 money supply for July was 5.1%, down from 5.2% in June and 6.5% in May. At 4.6%, the average YoY growth rate this year is however higher than the 4.1% average growth rate in 2012. I pointed out in the article for the June numbers (here) that the longer term growth rate for the M2 "has for the last two years or so dropped significantly compared to the historical trend". This downward trend in the growth rate did not change much in July as the 5 year annualised growth rate of 4.7% was substantially lower than the 8.4% average for the period December 2000 to June 2011 and the 7.2% average since December 1996. 

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