Norway’s central bank, the Norges Bank’s Monetary Policy and Financial Stability Committee in a surprise decision raised rates by 25bps to 4.50% at its December Meeting. The bank has lifted to borrowing costs that are the highest level since December 2008 as it sought to combat persistent inflation. Governor Ida Wolden Bache said “The forecast indicates that the policy rate will continue to lie around 4.5% until autumn 2024 before gradually moving down”.
The move is in contrast to yesterday’s dovish tone by the Federal Reserve. Of 27 economists polled in advance by Reuters, 15 had expected rates to stay on hold today while a minority of 12 had forecast a hike to 4.5%.
In hindsight the move was hardly a surprise the bank had five consecutive hikes by December, equaling the sharpest hike since 2002. In addition to this, the bank announced last meeting further hikes are likely in the future. They repeated guidance this morning by saying “Based on the Committee’s current assessment of the outlook, the policy rate will likely be raised in December” but with the caveat that if they become “more assured that underlying inflation is on the decline, the policy rate may be kept on hold.” said Ida Wolden Bache, governor of Norges Bank.
Norges Bank 4.50% was unexpected by the majority even though they guided to expect another 25bps hike in December last meeting.
Future Rate Path
“If the economy evolves as currently envisaged, there will not be a need for additional rate hikes,” Bache said.
“The forecast indicates that the policy rate will continue to lie around 4.5% until autumn 2024 before gradually moving down,” Norges Bank Governor Ida Wolden Bache said.
Norway’s central bank had said last month it would likely raise the cost of borrowing in December, with the caveat that a decline in core inflation could change its monetary policymakers’ minds.
“We see that the economy is cooling down, but inflation is still too high. An increase in the policy rate now reduces the risk of inflation remaining high for a long period of time,” Bache said in a statement accompanying the decision.
Having peaked at 7% in June, Norway’s annual core inflation, which excludes energy costs, stood at 5.8% in November, below the central bank’s forecast of 6.1% but still far above the 2% target.
The central bank raised its forecast for 2024 core inflation to 4.8% from a forecast of 4.7% made in September. The forecast for 2025 was raised to 3.5% from 3.4%.
The Norwegian crown has been consistently weaker than predicted by the central bank, potentially stoking inflation. On a trade-weighted basis, the currency had weakened by around 9% this year until Wednesday’s market close.
Rate decision December 2023
Policy rate raised to 4.5 percent
Norges Bank’s Monetary Policy and Financial Stability Committee decided to raise the policy rate from 4.25 to 4.5 percent at its meeting on 13 December. Based on the Committee’s current assessment of the outlook and the balance of risks, the policy rate will likely be kept at that level for some time ahead.
“We see that the economy is cooling down, but inflation is still too high. An increase in the policy rate now reduces the risk of inflation remaining high for a long period of time. The policy rate will likely be kept at 4.5 percent for some time ahead”, says Governor Ida Wolden Bache.
Inflation has been somewhat lower than expected but is still markedly above the 2 percent target. At the same time, business costs have increased considerably over the past few years, and there are prospects for continued high wage growth. The krone has depreciated further. This will keep inflation elevated ahead despite an easing of international price impulses. Employment is high, and unemployment remains low.
The policy rate is likely close to the level required to return inflation to target within a reasonable time horizon. The Committee is concerned with balancing the risk of tightening too much against the risk of tightening too little. The economy is now cooling down, and the full effects of the past rate hikes have yet to be seen. On the other hand, inflation is high, and the krone depreciation makes it more challenging to bring down inflation. An increase in the policy rate now will reduce the risk of inflation remaining high for a long period of time.
The Committee assesses that a tight monetary policy stance will likely be needed for some time ahead in order to return inflation to target within a reasonable time horizon. Further out, when inflation falls back and economic conditions so warrant, the Committee can start lowering the policy rate.
Compared with the forecast in the previous Report, the policy rate forecast is little changed in the near term but is somewhat lower further ahead. The forecast indicates that the policy rate will lie around 4.5 percent until autumn 2024 before gradually moving down.
There is uncertainty about future developments in the Norwegian economy. If cost inflation remains elevated or the krone turns out to be weaker than projected, price inflation may remain higher for longer than currently projected. In that case, the Committee is prepared to raise the policy rate again. If there is a more pronounced slowdown in the Norwegian economy or inflation declines more rapidly, the policy rate may be lowered earlier than currently envisaged.
Norges Bank will hold a press conference following the monetary policy decision in January.
Rate effective from 15 December 2023:
- Policy rate: 4.5 %
- Overnight lending rate: 5.5 %
- Reserve rate: 3.5 %
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.
Norges Bank’s next policy decision is due on January 25.
Source: Norges Bank
From The Traders Community Research Desk