Increasing Rates: And Norway Makes Three

The Norwegian central bank has hiked rates 25 basis points, making it the third central bank and first European central bank to do so since the global recovery process started.

The Financial Times says:

Norway’s central bank increased its key interest rate by a quarter point to 1.5 per cent on Wednesday – Europe’s first monetary policy tightening since the global economic crisis bit hard last year.

Norges Bank said it would gradually continue more rises, holding with its main rate at between 1.25 and 2.25 per cent until the next monetary policy report in late March.

Analysts believe the central bank seeks to keep rates around the mid-point of the range, signalling another 25 basis point rise.

Israel and Australia have also raised rates, with the Australian rate rise coming somewhat unexpectedly. Australia and Norway are particularly geared to commodities exports. As such, it is hard to say that these rate hikes have any significance for the rest of the developed world. At a minimum, they show that interest rates are not going lower; interest rate risk is now clearly to the upside.

Of particular note, should be the fact that the central bank cited asset prices as a driving motivation behind the increase in rates. Norges Bank head Svein Gjedrem recently warned that house prices were back to their summer 2007 peak and that the market risked overheating.

Comments

[Mr. Big:]

Export nations are (or will be) experiencing inflationary pressures that will push their respective central banks to increase interest rates. For the rest of the year and into the first half of 2010, we will see more and more export-based countries raise interest rates, if (big if) the global economy recovery holds.

This does not bode well for the strength of the US dollar as carry-trades (with the USD) become more attractive and profitable. Over the medium term, the declining purchasing power of the greenback will translate to higher inflation and higher unemployment as imported goods (and raw materials) become more expensive, forcing companies to either raise prices for final goods or layoff more workers.

The US would be best served to ensure that interest rate differentials do not get out of hand over the medium term.

Oct 28 02:52 PM

[bob adamson:]

A big question for both Australia and Norway will be the fate of the recent rise of commodity prices. If the USD recovers somewhat with a corresponding drop in commodity prices (particularly that of oil, then the domestic recovery each is experiencing may well slow significantly.

In any case, the situations for both Australia and Norway are each quite unique and it is, arguably, too early to read into the recent rate hike in each the beginning of a firming (or even upward) trend for economies generally elsewhere.

Oct 28 05:48 PM

[Value Added:]

Interest rates cannot be held artificially low forever. Eventually the QE actions of the central banks must result in an opposite reaction by natural forces. But making rate decisions must be a great challenge at this time, since some asset classes are rising in price and others are not, and central banks cannot operate completely independently of one another.

Oct 29 08:40 AM

[a. palmer jr.:]

And I assume that the United States will be one of the last countries to raise their rates. That would probably come closest to fixing our problems right now, so let's put that on the back burner!

Oct 29 10:00 PM