Thursday, 11 December 2014

Rate Decision: Norges Bank Decides to Further Support the Norwegian Debt Fest

Norges Bank, the central bank of Norway, today "surprisingly" decided to lower the key policy rate by 25bp to 1.25%. The press release reads:
Key policy rate lowered by 0.25 percentage point to 1.25 percent
Norges Bank's Executive Board decided to lower the key policy rate by 0.25 percentage point to 1.25 percent.
The upturn in the world economy remains moderate and there is considerable uncertainty surrounding developments ahead. Growth prospects for the Norwegian economy have weakened. Activity in the petroleum industry is softening and the sharp fall in oil prices is likely to amplify this tendency. This will have spillover effects on the wider economy and unemployment may edge up ahead. At the same time, the krone has depreciated markedly, which is helping to dampen the effects on the Norwegian economy and underpin inflation.
"The analysis in the Monetary Policy Report presented today implies a key policy rate of 1¼ percent, or somewhat lower, in the period towards the end of 2016", says Governor Øystein Olsen.
Capacity utilisation in the mainland economy will probably decline to a further extent than projected earlier, but is expected to increase again towards the end of the projection period. Inflation is projected to lie close to 2.5 percent in the coming years.
The Executive Board decided at its meeting that the key policy rate should lie in the interval ¾–1¾ percent in the period to the publication of the next Report on 19 March 2015, unless the Norwegian economy is exposed to new major shocks.
As Norges Bank explains on its website,
In Norway, the key policy rate is the interest rate on banks' deposits up to a quota in Norges Bank.
This interest rate is also called the sight deposit rate. Changes in Norges Bank's key policy rate will normally have a strong impact on short-term money market rates and on banks' deposit and lending rates. 
This lowering of the rate is no surprise whatsoever as central banks around the world don't even need an excuse these days to push rates toward zero. They are all being equally irresponsible and Norges Bank is no different. Note that being reckless is not justified simply because all other central banks are. 

What are some of the consequences of today's action by the bank? Overall market interest rates will decline (or increase less than otherwise), including mortgage rates, and the Norwegian krone will weaken relative to other currencies. Interest rates on savings will be pushed yet lower (as they have been all year) even though they currently come nowhere close in compensating for CPI inflation, not to mention money supply growth. Further debt and money growth, less ordinary bank savings and a lower purchasing power of the Norwegian krone (home and abroad) will follow. Do remember that a lower purchasing power of a currency is a tax in itself and will make people worse off (an economy consists of individuals).

The export industry gains from Norges Bank's action today, but this is paid for by everyone else one way or another. Lowering interest rates is never a win-win situation when it is brought about artificially - somebody always ends up paying for the fun, commonly presented as a "free lunch" by policy makers and other demagogues. As mortgage rates will likely fall further (or increase less than otherwise), house prices will also be pushed higher than otherwise fueled not only by lower rates, but also by increased lending. This will be no deterrent to the already bloated level of household debt in Norway. Banks will make ever more money, but this will have to be paid for by anyone owning Norwegian kroner when Norges Bank ultimately needs to bail them out once again as bank balance sheets are not fit to sustain much of a blow.  

Of course, the real problem with today's central bank action is that a decision affecting all has been made by a central planner. One would have thought socialism and central planning would have died with the Soviet Union. There would be no place for a central bank in a free market economy. But since we happen to have one and don't live in a free market economy, the bank just blew yet another chance to be prudent. Over time, every Norwegian will pay the price as a result of the artificial booms and very real economic busts Norges Bank helps create with its easy money policies.  

The average Norwegian will become even more of a debt slave in one of the richest countries on earth as a result of Norges Bank's lowering of the key policy rate today. Sadly, Norges Bank has learned nothing from all the errors made by other central banks. It's simply copying their inflationary policies and has done so for quite some time. And the bank will continue to do so going forward so don't be surprised the next time it lowers the rate.

The Household Debt Fest Continues Undeterred in Norway