In the early days of the crisis, Ben Bernanke and Jean-Claude Trichet injected liquidity on an unprecedented scale to prevent a financial meltdown. Central bankers elsewhere did little to help their cause.
In fact, their reserve managers – the people responsible for investing monetary authorities’ foreign exchange stockpiles – made matters worse.
Reserve managers often stash a chunk of their stock piles in short-term bank deposits. But at the start of the crisis, research produced by the IMF found they had pulled about $500bn of deposits from the banking sector, contributing to financial instability in the process. This from the research:
IMF: Although clearly not the main cause, this pro-cyclical investment behaviour is likely to have contributed to the funding problems of the banking sector, which required offsetting measures by other central banks, such as the Federal Reserve and the Eurosystem central banks.
There is, as the paper notes, “a potential conflict between the reserve management and financial stability mandates of central banks”. And so news that Norway’s sovereign wealth fund (managed by the central bank, though the asset allocation strategy is decided by the finance ministry) will take on more risk during downturns is to be welcomed. Read more
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The key event in next week’s calendar is the Federal Open Market Committee’s policy meeting, which Ben Bernanke announced at Jackson Hole would be a longer-than-usual two-day affair. Read more
Now that the Swiss National Bank has said it will cap the franc’s appreciation against the euro, investors are on the lookout for a new safe haven currency.
Attention has turned to the Norwegian krone, with the currency hitting an eight-and-a-half year high of NKr7.4825 against the euro on Wednesday.
Though Øystein Olsen, the governor of Norges Bank, was clear that the central bank would not for now intervene, he did acknowledge that an appreciation could weaken domestic growth.
With interest rates at 2.25 per cent, the central bank has room to loosen policy if the krone’s appreciation proves too heady. But – some argue – it may not have to bother. Read more
All eyes will be on the Federal Open Market Committee on Tuesday to see if it does announce a third round of asset purchases.
What with the global market uncertainty and former Fed officials of the calibre of Don Kohn suggesting QE3 may be the wisest course of action, the chances of the US central bank doing so have risen markedly since the idea was first mooted by the FOMC in its June minutes. The statement is due out 19.15 London time.
BoE inflation report
The Bank of England will hold its quarterly Inflation Report press conference on Wednesday, beginning at 10.30. Again, investors will be on the lookout to see what the Bank’s thinking is on the threshold for another round of QE. Read more
Surprisingly low inflation figures from Norway will weaken the already-dubious case for a rate hike. Annual core inflation in January fell to 0.7 per cent from 1 per cent the month before. Headline inflation fell from 2.8 to 2 per cent. The target is 2.5 per cent and many analysts had expected a rise in core inflation.
Indeed, the persistent downward trend of the two core measures of inflation (red and blue on the chart) might add to the case for some monetary loosening. Care must be taken relying on annual figures, though, as a new source of weightings applies to the consumer price indices as of 2011. Month-on-month figures over the next few months will give a better indication.
Rates must rise in Norway, and “not too slow[ly]” either. This from the head of Norway’s Financial Supervisory Authority, Bjoern Skogstad Aamo. Reuters news wire quotes his concern on bubbles, housing in particular. Household debt levels, as well as house prices, are “historically high”.
“It is important to reduce the risk of new crises through a gradual, and not too slow, normalisation of interest rates, through limits on bank housing loans, strict standards on banks’ equity and continued active supervision of property markets,” he said. Read more
Charts accompanying today’s rate-hold decision from Norway include Belgian data in with that of so-called “peripheral” countries – Portugal, Italy, Ireland, Greece and Spain. Yield charts also now include Belgium. (A table showing debt and deficit for PIIGS plus Belgium was included in both sets of slides.)
Norway held rates at 2 per cent as expected, pointing to a fine balance between current low (core) inflation and signs that it may be about to pick up. Read more
Norway’s surprise jump in headline inflation – from 1.9 to 2.8 per cent y-o-y – has some pundits asking whether the central bank will raise rates early.
Norges Bank has previously signalled it intends to keep rates on hold at 2 per cent until the middle of the year. Now a 19.9 per cent monthly jump in electricity prices have pushed headline cpi over the 2.5 per cent target, and some journalists are debating an earlier rate rise, perhaps as soon as March. Read more
Several news outlets are reporting bullish overtones from Norway’s central bank, as it today kept rates on hold for the seventh month. The phrase they refer to is this: “the key policy rate should not be kept low for too long.”
This phrase was also used in October, however, and should not prejudice the reader against data on inflation and exchange rates that encourage a continued low rate. Norges Bank’s phrase might be to manage inflation expectations, or its definition of “too long” might simply be longer than that of the average journalist; but it would be quite odd if the central bank were to raise rates imminently. The bank itself says: “Both the consideration of bringing consumer price inflation up to target and the consideration of stabilising developments in output and employment imply a low key policy rate.”
Norway’s y-o-y inflation is 1.9 per cent, against a target of 2.5 per cent. It is projected to fall below 1 per cent before rising next year, with the outlying scenarios including deflation (see chart, right). Norges Bank is clearly worried about falling inflation. At the last monetary policy meeting in October, the Bank mentioned a fear that “financial imbalances … may trigger abrupt and sharp falls in output and inflation.” Read more
Norway expects to hold its key rate at 2 per cent for several quarters, barring any shocks, the central bank said today. Reduced growth forecasts for the US and a world recovery “still shrouded in uncertainty” are dampening inflationary pressures. It’s becoming a familiar refrain among former rate-raisers: a moderate recovery domestically offset by continuing fears for trading partners.
Key rates are close to zero in many countries and the expected upward shift in interest rates has been deferred further ahead. Long-term interest rates are very low. The level of activity among Norway’s trading partners will probably be below normal for several years. This will contribute to holding down inflation abroad. Read more