Norges Bank Watch 2015 Kyrre Aamdal, DNB Kjell Erik Lommerud, Universitetet i Bergen
Intermediate Report Evaluate Norges Bank s assessments and discretion Discuss some additional and related issues
Summary Decisions in September and December September: Removed negative bias December: Policy rates were cut Monetary policy and financial stability Theory versus practice Be more clear about how financial stability affect policy rates Room to improve communication about assessments Interest rate accounts and criteria for monetary policy provide important information, but may blur how factors are discussed and assessed Minutes NOK purchases
Monetary policy in 2014
Economic background Expansive monetary policy abroad Negative deposit rate QE Falling forward interest rates Weaker domestic outlook
Inflation close to target Inflation close to target 3.0 Core Inflation, CPI-ATE per cent But strong rise in housing prices and rising household debt ratio 2.7 2.4 2.1 1.8 1.5 Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 Actual MPR4/13 MPR1/14 MPR2/14 MPR3/14 MPR4/14 Source: Statistics Norway/Norges Bank/NBW
Policy Rate Unchanged until December Market reactions Change in policy More weight to stable rates Interest rate accounting Norges Bank s rate paths versus 3.0 2.5 2.0 1.5 1.0 0.5 Policy rate, per cent 0.0 2011 2012 2013 2014 2015 2016 2017 2018 MPR4/13 MPR1/14 MPR2/14 MPR3/14 MPR4/14 Source: Norges Bank/NBW
Flattening Policy Rate Path Weaker prospects for Norway pulled rates down but partly offset by a falling NOK 1.5 1.0 0.5 0.0-0.5 Cummulative contributions from MPR 4/13 to MPR 4/14 percentage points Declining forward rates -1.5 abroad also pulled down -2.0-1.0 Q4 2014 Q1 2015 Q2 2015 Q3 2015 Q4 2015 Q1 2016 Q2 2016 Q3 2016 Q4 2016 Capacity utilisation Prices and costs Lending margins Growth abroad Exchange rate Rates abroad Acceleration Source: Norges Bank/NBW
Discretionary Policy Policy rate paths based on criteria 1&2 per cent Policy rate per cent 3.0 3.0 2.5 2.5 2.0 2.0 1.5 1.5 1.0 1.0 0.5 0.5 0.0 2013 2014 2015 2016 2017 2018 MPR 4/13 MPR 1/14 MPR 2/14 MPR 3/14 MPR 4/14 Source: Norges Bank/NBW 0.0 2013 2014 2015 2016 2017 2018 MPR4/13 MPR1/14 MPR2/14 MPR3/14 MPR4/14 Source: Norges Bank/NBW
Predictability and Transparency Interest rate decisions were well forecasted But the change in December was not expected EURNOK changed more than 8 øre at 4 meetings 27 Mar, EURNOK down 8 øre 19 Jun, EURNOK up 12 øre 18 Sep, EURNOK down 12 øre EURNOK 11 December 9.10 9.05 9.00 8.95 8.90 11 Dec, EURNOK up 10 øre 8.85 08:00 09:00 10:00 11:00 12:00 Source: Bloomberg/NBW
The June Meeting «The analyses imply that the key policy rate be held lower longer than previously projected. There are prospects that the key policy rate will remain at about today's level to the end of 2015, followed by a gradual rise. A further weakening of the outlook for the Norwegian economy may warrant a reduction in the key policy rate» 0.2 0.1 0.0-0.1-0.2-0.3-0.4-0.5-0.6 2014 Q4 Source: Norges Bank/NBW 08:00 Source: Bloomberg/NBW From MPR 1/14 to MPR 2/14 percentage points 2015 Q4 Petroleum investment Interest rates abroad 09:00 EURNOK 18 June 10:00 2016 Q4 Prices Lending margins 11:00 2017 Q4 8.35 8.30 8.25 8.20 8.15 8.10 12:00
The September Meeting Downside bias removed Weaker NOK and falling interest rates abroad The dominant factors on the short term were inflation and weakening of the NOK 0.20 0.15 0.10 0.05 0.00-0.05-0.10-0.15-0.20-0.25 2014 Q4 From MPR 2/14 to MPR 3/14 percentage points 2015 Q4 2016 Q4 Capacity utilisation Prices Foreign demand Interest rates abroad Exchange rate Source: Norges Bank/NBW EURNOK 18 September 2017 Q4 8.30 8.28 Flexible inflation rate path had policy rates in 2015 13 bps lower in the September path than in the June path 08:00 09:00 10:00 11:00 8.26 8.24 8.22 8.20 8.18 12:00 Source: Bloomberg/NBW
The October Meeting New information suggests that inflation and growth in the Norwegian economy are broadly in line with the September projections. Against this background, the key policy rate remains unchanged. At the same time, developments abroad and the fall in oil prices has increased the uncertainty regarding the outlook for the Norwegian economy. The NOK had weakened since September The banks had lowered their mortgage rates Housing prices had risen more than expected More expansive government budget
The December Meeting Oil prices have fallen sharply and the outlook for the Norwegian economy has weakened. The interest rate has therefore been cut 2.4 2.2 2.0 1.8 3-Month Forward Interest Rates 11 December IMM dated, per cent Flexible inflation policy rate path showed a lower interest-rate path for 2015 in Sep vs Dec 1.6 1.4 1.2 1.0 2014 2015 2016 2017 2018 2019 09:46 13:30 Source: DNB Markets/NBW Skewed downside risk - proactive
The December Meeting Reuters survey released 5 December: 1 out of 16 forecasted rate cut at the December meeting 7 out of 16 forecasts 1 or 2 rate cuts during 2015 Period Dec Mar May Jun Sep Nov Dec First Hike 4cast 1.50 1.50 1.50 1.50 1.50 1.50 1.50 Q1 2016 Capital Economic 1.50 1.25 1.25 1.25 1.25 1.25 1.25 DNB Markets 1.50 1.50 1.50 1.25 1.25 1.25 1.25 Q3 2016 Danske Bank 1.50 1.50 1.50 1.50 1.50 1.50 1.50 Q3 2016 Eika Gruppen 1.50 1.25 1.25 1.25 1.00 1.00 1.00 Handelsbanken 1.25 1.25 1.25 1.25 1.25 1.25 1.25 Q1 2017 IDEAglobal 1.50 1.50 1.50 1.50 1.50 1.50 1.50 Q1 2016 IHS Global 1.50 1.50 1.50 1.50 1.50 1.50 1.50 Q1 2016 ING Fin Mkts 1.50 1.50 1.50 1.50 1.50 1.50 1.50 Q2 2016 Nordea Markets 1.50 1.50 1.50 1.50 1.50 1.50 1.50 SEB 1.50 1.50 1.50 1.50 1.50 1.50 1.50 Q2 2016 Sparebank 1 Markets 1.50 1.25 1.25 1.00 1.00 1.00 1.00 Sparebanken Moere 1.50 1.25 1.25 1.00 1.00 1.00 1.00 Q1 2017 Swedbank 1.50 1.50 1.25 1.00 1.00 1.00 1.00 Q2 2017 Sydbank 1.50 1.50 1.50 1.50 1.50 1.50 1.50 Q3 2016 UniCredit 1.50 1.50 1.50 1.50 1.50 1.50 1.50 Mean 1.48 1.42 1.41 1.34 1.33 1.33 1.33 - Median 1.50 1.50 1.50 1.50 1.50 1.50 1.50 - Source: Thomson Reuters/DNB Markets
NOK Purchases Norges Bank purchases NOK and sell foreign exchange revenues from SDFI In previous years, Norges Bank purchased foreign currencies This arrangement is not a part of the monetary policy However, some might observe that Norges Bank is purchasing its own currency and think this is a part of a currency stabilizing policy Recommentations: Be more specific about the factors contributing to changes of the purchases Publish the size of the petro buffer portfolio monthly Publish information about planned changes in the petro buffer portfolio Publish a path for monthly purchases
Evaluation Sound use of discretion («third criterion»)? «Financial stability» concerns Good communication? Changing interest rate paths without rate cuts The three first monetary reports in 2014
The third criterion Through most of 2014 the third criterion was about «financial stability» In December, concern for falling oil prices and need to act proactively overwhelms nfinancial stability
Arguments against interest rate cut Oil sector cuts spreads very slowly to rest of the economy Housing prices still a concern?
Caveats We do not think there is a «bubble» in the housing market We are aware that building costs are high which restricts supply We do think unemployment will rise But we would perhaps have waited to see how things developed
Financial stability Are there other instruments? Countercyclical capital buffer? Saves banks, but not borrowers? Own capital demands? Inequitable, politically dead
Communication Continued fall in oil prices Market came to expect two or three further rate cuts NB communication could stress alternative scenarios more
Minutes Fuller knowledge of board discussions could help predict NB behavior when circumstances change We understand need for anonymous discussions
The three first MPRs Some changes in forecasts are very small and removed in time Do we measure for example inflation and production gap with this level of precision?
Conclusion On the whole NB does an excellent job Very sound framework for monetary policy We would perhaps have delayed December cut till March If even lower oil price and interest rate cuts in neighboring countries does not imply key policy rate of 0.50 0.75, NB should perhaps have told us?