Norway’s central bank, the Norges Bank’s Monetary Policy and Financial Stability Committee unanimously raised the policy benchmark interest rate by 25 bps to 3.25 percent during its May meeting, bringing borrowing costs to the highest level since December 2008, in line with market expectations. The Committee noted that the latest inflation readings were well above the central bank’s target of 2%. said the policy rate will need to be increased somewhat further to bring inflation in line.
The bank indicated that it is likely to raise interest rates again in June if the krone remains weaker than expected or if there are persistent pressures in the economy.
The bank had five consecutive hikes by December, equaling the sharpest hike since 2002. The central bank now sees a rise in the policy rate to around 3.5 percent in summer.
“High inflation has prompted central banks in many countries to raise policy rates quickly and more than in Norway. The Norwegian krone has depreciated in recent months and is now at its weakest level since the onset of the pandemic in spring 2020. The krone is weaker than we projected in March.” says Governor Ida Wolden Bache.
Turbulence in international banking markets
The problems last month at certain US and Swiss banks have led to large movements in global financial markets and returned with more turmoil in the US regional banks. Equity markets have fallen, and risk premiums in money and bond markets have increased a little. Expectations for both Norwegian and international policy rates have declined markedly.
Inflation
While underlying inflation has been in line with projections, higher wage growth and the weakening of the krone are expected to keep inflation elevated. Growth in the Norwegian economy has slowed, but activity remains high.
Norway’s annual inflation rate eased to 5.9% in December 2022, below market expectations of 6.1% and from 6.5% in the previous month. It was the softest increase in consumer prices since May.
- Cost mainly slowed for food & non-alcoholic beverages (11.5% vs 12.7% in November), housing & utilities (2.4% vs 4.9%), clothing & footwear (1.4% vs 2.1%), and transport (7.8% vs 9.6%).%).
- Inflation increased for or furnishing, household goods & maintenance (9.5% vs 7.6%), communication (5.2% vs 1.8%), recreation & culture (7.1% vs 5.6%) and restaurants & hotels (7.4% vs 6.6%).
- CPI adjusted for tax changes and excluding energy products, rose 5.8% year-on-year.
- On a monthly basis, consumer prices edged higher to 0.1%, following a 0.2% drop in November.
Norges Bank Rate decision May 2023
Norges Bank’s Monetary Policy and Financial Stability Committee decided to raise the policy rate from 3 percent to 3.25 percent at its meeting on 3 May. Based on the Committee’s current assessment of the outlook and balance of risks, the policy rate will most likely be raised further in June.
In the March 2023 Monetary Policy Report, which was published on 23 March, the Committee’s assessment was that the policy rate would most likely be raised further in May. The policy rate forecast indicated a policy rate increase to around 3.5 percent this summer. There were prospects that inflation would recede and approach the target somewhat further out. Unemployment was projected to edge up, albeit from a low level.
Higher policy rate expectations and a weaker krone
Consumer price inflation among Norway’s main trading partners has slowed further but is still high. Underlying inflation has shown little change. Futures prices for oil, gas and power have risen somewhat since March. Economic activity among trading partners appears to have been slightly higher in the first quarter than projected in the March Report. In many countries, indicators of service sector activity have increased in recent months.
Problems at some banks in the US and Switzerland led to large movements in financial markets in March. Global equity indexes have risen since the March Report, and bond risk premiums have fallen. Credit conditions facing US and European households and firms appear to have tightened somewhat. Central banks in many of Norway’s trading partner countries have raised policy rates further and are signalling that rates will likely be raised somewhat more. Both Norwegian and international market-implied policy rate expectations have risen. The Norwegian krone has depreciated and is weaker than projected.
Growth in the Norwegian economy has slowed as expected
Growth in the Norwegian economy has slowed in recent months, and in February mainland GDP was approximately as projected in the March Report. Household consumption has increased and has been slightly higher than expected. In the secondary housing market, the number of unsold homes has declined, and house prices were higher than expected in March. New home sales have fallen further, and housing starts are at a low level.
The labour market remains tight. Registered unemployment increased as expected from 1.7 percent in March to 1.8 percent in April, while employment appears to be somewhat higher than projected in the March Report. The number of new job vacancies has declined.
In the wage settlement between the Norwegian Confederation of Trade Unions (LO) and the Confederation of Norwegian Enterprise (NHO) and in several of the other settlements, a wage norm of 5.2 percent was agreed for 2023. The wage norm for the local government sector ended up at 5.4 percent. Overall, this would suggest that annual wage growth will be slightly higher than projected in the March Report.
Underlying inflation as projected
Inflation is high. The 12-month rise in the consumer price index (CPI) edged up to 6.5 percent in March. This was higher than projected and reflects the higher-than-expected rise in energy prices. The 12-month rise in the CPI adjusted for tax changes and excluding energy products moved up to 6.2 percent in March as projected earlier. Other indicators of underlying inflation also increased. The rise in prices for imported goods was higher than expected, while the rise in prices for domestically produced goods and services was lower than projected.VIEW CHARTUnderlying inflation as projected
Policy rate raised to 3.25 percent
The operational target of monetary policy is annual consumer price inflation of close to 2 percent over time. Inflation targeting shall be forward-looking and flexible so that it can contribute to high and stable output and employment and to countering the build-up of financial imbalances.
The Committee assesses that a higher policy rate is needed to dampen inflation. Inflation is high and markedly above target. Growth in the Norwegian economy has slowed, but activity remains high. The labour market is tight, and wage growth is set to be higher in 2023 than last year.
The future policy rate path will depend on economic developments. Since the March Report, economic activity has been broadly in line with expectations. Underlying inflation has been as projected. Higher wage growth and the krone depreciation will contribute to keeping inflation elevated ahead. If the krone remains weaker than projected or pressures in the economy persist, a higher policy rate than envisaged earlier may be needed.
The Committee unanimously decided to raise the policy rate by 0.25 percentage point to 3.25 percent. Based on the Committee’s current assessment of the outlook and balance of risks, the policy rate will most likely be raised further in June.
Norway Oil Fund
Norway’s $1.4tn wealth fund is the world’s largest sovereign wealth fund. It began in 1996 when oil revenue from the government was transferred to the fund for the first time. The mission of the fund is to provide financial wealth and stability for future generations of Norwegians once the oil revenues declines.
” The Government Pension Fund Global is saving for future generations in Norway. One day the oil will run out, but the return on the fund will continue to benefit the Norwegian population.” via Norway Fund
Norway’s oil fund owns on average 1.5 per cent of every listed company globally according to the FT.
Inflation and Fund Management
Inflation is identified as an issue at the oil fund, CEO Tangen, who warned that climate change will keep inflation high, said the fund was already using advanced algorithms to reduce trading costs and complexity and to boost internal productivity.
“The way we are putting money into the market, we are using AI models to predict when in the day, or over the month- or quarter-end we should deploy the capital. We are reducing trading activity because we are using AI models,” he said in an interview with FT.
“So, you can reduce the number of trades, and there are huge savings to be had there too,” he said, adding that: “It’s not like it’s on complete autopilot. We are monitoring it. It’s not like we’re the giving the fund to robots, and saying ‘hey, see you later’.”
Source: Norway, Sovereign wealth fund institute, FT
Clearly the small Nordic nation has been very successful in it’s investments and is prudent when comes to monetary policy.
2022 and January 2023 Return Update
At the end of January 2022 Norway’s $1.3tn oil fund had recovered in the first month of 2023 after its worst year since the global financial crisis. The fund had an annual return last year of minus 14.1 per cent, or NKr1.6tn ($159bn). It came with the biggest fall in Norwegian kroner terms on record. The sovereign wealth fund gained 5 per cent in January 2023, chief executive Nicolai Tangen told a press conference.
“It’s potentially one of those moments,” he said, referring to the rebound in 2009 after the financial crisis, “but the outcome this year is more uncertain than normal”.
The fund has also reduced its positions in the troubled Adani group of companies, Tangen said. The fund had holdings as of Monday of about $200mn in Adani companies, compared with its weight in the fund’s index of about $800mn.
The Fund is managed by Norway’s central bank, Norges Bank. Norges Bank Investment Management ” aims to make the most of the fund’s two distinguishing characteristics, its long-term approach and its considerable size, to generate strong returns and safeguard wealth for future generations.”
Equities had a negative return of 15.3 per cent, bonds lost 12.1 per cent while property eked out a 0.1 per cent gain.
Worse performers were technology companies with the worst performers of all the fund’s equity investments were Amazon, Meta, Tesla, Alphabet and Apple as a result of the sell-off in big tech companies that led the pandemic-era rally in 2020-21.
Best performers were energy companies, with ExxonMobil, Chevron, TotalEnergies and Shell plus drugmaker Novo Nordisk for the fund in 2022.
The aim is of the fund is diversification and that was shown with the fund as a whole not losing value in 2022 despite the large negative return as huge inflows from Norway’s oil and gas revenues, boosted by Russia’s war against Ukraine, stood at record levels. Norway’s petroleum revenues soared as the Scandinavian country displaced Russia as the biggest supplier of gas to the EU.
The aim of the fund was diversification from oil and to invest in opportunity. “We invest in almost 9,000 companies and have investments in 77 countries.’ Says Norges Bank on their website.
Outside of Oslo Norges Bank has offices in Luxembourg, Tokyo, London, New York, Singapore and Shanghai to manage their investments. The spread gives you an idea of their focus.
Source: Norges Bank
From The Traders Community Research Desk