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
