On several occasions this year we’ve profiled Norway where the central bank, much like the Riksbank in neighboring Sweden, is walking a fine line between keeping rates low to support the economy (not to mention remain competitive in the global currency wars) and being mindful of the effect low rates have on an overheating housing market.
Like the Riksbank, The Norges Bank is in a tough spot. The property bubble quite clearly needs to be arrested but using monetary policy to rein in the housing market means leaning hawkish in a world of DM doves and that can be exceptionally dangerous especially when your economy is heavily dependent on oil and crude prices are crashing.
Indeed, the pain from low oil prices has become so acute that Norway may ultimately be forced to tap its $900 billion sovereign wealth fund in order to avoid fiscal retrenchment.
Given the above, no one was surprised (well, no one except PhD economists, most of whom got this one wrong) when the Norges Bank cut rates on Thursday, taking the overnight depo rate to a record low of 0.75%. Here’s Bloomberg:
Norway’s central bank cut interest rates to an all-time low and said it may ease policy further as it seeks to rescue an expansion in western Europe’s biggest petroleum producer amid a plunge in oil prices.
The overnight deposit rate was lowered by 25 basis points to 0.75 percent, the Oslo-based central bank said Thursday. The move was forecast by seven of the 17 economists surveyed by Bloomberg, with the remainder expecting no change. The bank forecast its rate may fall as low as 0.59 percent in third quarter of next year. The krone plunged 2 percent against the euro on the news, its biggest drop since August.
“Growth prospects for the Norwegian economy have weakened, and inflation is projected to abate further out,” Governor Oeystein Olsen said in a statement
After easing policy in June, Olsen signaled as much as a 70 percent chance of another rate cut this autumn. Since then, oil prices have dropped about 25 percent. That has driven down the krone by about 7 percent against the euro in the period, pushing inflation above the central bank’s 2.5 percent target.
The collapse in oil prices is already taking its toll on the $500 billion economy. Mainland growth slowed to 0.2 percent in the second quarter while total output shrank 0.1 percent. Unemployment is now hovering at the highest since 2006 as oil companies have cut more than 20,000 jobs.
Of course the FOMC’s “clean relent” was a factor as the following (again from Bloomberg) makes clear:
Governor Oeystein Olsen Says Fed’s decision to hold rates earlier this month came at a time when “interest rate expectations were down when we compared it with our previous estimates. The decision by the Fed supported that picture. It was not decisive, it underlined and strengthened our picture”
Says “all central banks are waiting for the Fed. There are a number of challenges with continuing in a low interest- rate world that have spillover effects on smaller economies. The low interest rate level in Norway is explained by the fact that rates internationally are at a very low level. That will be important for everybody
Says is ‘‘aware that lower rates could fuel the housing market. There are other forces in play here: the general increased slack in the economy -- increased unemployment -- stricter lending conditions in banks which are now imposed by the ministry. We already see and hear that it has had some effect on bank behavior. Most importantly, there are other considerations for guiding our interest rate decision -- the outlook for the Norwegian economy is slightly worse than what we saw in June”
And here's Goldman's take:
Norges Bank cut its policy rate path today by 25bp to 0.75%. Uncertainty ahead of today's decision was very high. Our base case was for no change, but we had pencilled in an almost equal risk of a cut. The consensus expectation was also for no cut, but only marginally so (Cons, GS: 1.0%). Norges Bank adopted something close in line with our alternative scenario, whereby the fall in oil prices was seen as materially affecting the economic outlook (via weaker offshore oil investments) and the recent upside surprise to inflation was seen as more transitory, resulting in a cut and the adoption of a dovish policy rate path. This path indicates around a 60%-70% probability of another cut over the coming year. In addition, the adopted path remains low and flat for most of 2017 and 2018. The revision to mainland growth was nevertheless small, while inflation in the coming two years was revised up.
All of the above served to send NOK plunging to a 13-year low against the dollar and a YTD low against Sweden's krona (paging Stefan Ingves: Sweden is still losing in the currency wars):
Bottom line: if the now ubiquitous "lower for longer" crude thesis plays out, and if the ECB ends up plunging further into NIRP and dragging the Riksbank and the SNB with it, don't be surprised to see Norway cut further even if doing so means exacerbating the housing bubble.
Meanwhile, in Taiwan, the central bank cut rates for the first time since 2009 overnight and it's not too difficult to guess why. The yuan devaluation depressed onshore demand just as it weighed on regional export competitiveness and ultimately, Taiwan simply couldn't afford to hold out any longer. Here's Bloomberg:
Taiwan lowered its policy rate for the first time since the global financial crisis, sending forwards on the island’s currency to a six-year low.
The central bank cut the benchmark discount rate by 12.5 basis points to 1.75 percent, it said in a statement in Taipei on Thursday. Eleven of 24 economists surveyed by Bloomberg predicted a cut, while the remaining 13 had expected the rate to be held for the 17th straight quarter.
Taiwan’s economy is slowing as its technology exports are weighed by increased competition from China, where growth is also moderating. The island’s expansion rate for the third quarter will be lower and inflation is subdued, central bank Governor Perng Fai-nan said at a press briefing after the rate decision was announced.
Speculation of a rate cut mounted as the island’s economic outlook deteriorated. In June, only two of 26 economists polled by Bloomberg expected a reduction in 2015, with three seeing a hike. Expectations for steady policy had helped make Taiwan’s dollar among the best performing emerging-market currencies this year as central banks from China to India all eased cash supply.
Like the rest of Asia, Taiwan is suffering from weaker exports and growth with the only surprise being that the central bank hadn’t cut before today, said Gareth Leather at Capital Economics Ltd. in London.
"It’s Taiwan playing catch up."
So in short, the global currency wars continue unabated as a combination of a dovish Fed, lackluster global demand, and slumping commodity prices conspire to accelerate the race to the bottom.
As we never tire of reminding the world's central banks, incessant rate cutting and the persistence of ultra accommodative monetary policy comes with very real risks including, but certainly not limited to, property bubbles like those seen in Norway and Sweden, and the irony is that when these risks finally manifest themselves in crisis, central banks will be in no position to respond because they will have exhausted their counter-cyclical breathing room by pushing forward with the very same policies that created the crises in the first place.