Thursday, March 31, 2016

"Knowing Your Nordics: An Overview of Central Bank Policy and the Negative Rate Environment" (NOK; SEK; DKK)

From M&G's Bond Vigilantes:
There has been a barrage of G7 central bank coverage in March, culminating in much talk, but resulting in – on the whole – little new action. The Bank of Japan remained on hold (after adopting a surprise negative rate policy at the end of January), the Federal Open Market Committee (FOMC) delivered a “dovish hold” (keeping interest rates unchanged while lowering their longer term rate guidance) and the Bank of England voted unanimously to keep the interest rate at 0.5%.

Some of the more interesting policy action has been in Europe where the European Central Bank unveiled a raft of additional measures in its latest round of monetary easing, which included a further cut to its already negative deposit rate. Again, this has been well covered by market commentators. But perhaps some of the lesser discussed – though no less deserving – coverage of late has been given to the Nordics, where negative nominal rates have been a feature of some of these markets for some time. If the Nordic region is the gaping hole in your monetary policy bank of knowledge, the following discussion should go some way to address this.
Norway: Eased in March, more to come?
On 17th March – the day after the FOMC meeting – the Norges Bank cut its deposit rate from 0.75% to a new low of 0.5%. The weaker external growth environment, looser policy abroad and renewed oil price swings were some of the reasons cited for this move.

The Norges bank has an inflation target of 2.5% and whilst the CPI inflation forecast was revised upwards in the short term (from 2.6% to 3.2% for the first quarter of this year), much of this is due to the lagged impact of the Krone depreciation experienced in line with the fall in the oil price in 2015. Given the YTD rebound in the Krone, the currency effect is likely to dissipate in the longer term. Teamed with a potentially slowing global demand environment as well as subsiding domestic wage pressures, inflation is forecast to end 2019 at 1.6%, well below target.

Like many of its developed country peers, Norway now too finds itself flirting with the zero lower bound. What is of particular interest is that the central bank has not ruled out the use of negative nominal interest rates declaring that “should the Norwegian economy be exposed to new major shocks, the Executive Board will, however, not exclude the possibility that the key policy rate may turn negative”. Perhaps one to watch in the race to the bottom....MORE