Norway’s Interest Rate Conundrum

Submitted by Alexander Grover

Current Situation

The ECB recently stimulated more than expected, cutting rates by five basis points and expanding  quantitative easing. It is already expected that Norges Bank (The Norwegian Central Bank) will cut rates next week, seeing accelerating inflation as temporary. They have a 2.5% inflation target mandate “over time,” giving them lee-way. They see demand falling off while the local economy, driven by exports, recovering. Therefore, they feel that they can cut rates. My previous articles challenged the assumptions that the oil sector will recover, showing that new technology reduces long term prices below offshore break-even points, and exports can make up the difference, illustrating that key sectors, like fishing, can be replicated in Canada, Maine, Russia and Japan.

We are experiencing 1970’s style stagflation, coming from the supply side, not demand. Prices are going up because Norges Bank continues to destroy the Norwegian Krone, turning it into the Nordic Peso. This is where they are “hiding” the damage to save rest of the economy. For example, housing prices will rise in NOK but fall in USD or gold (universal commodity) terms. It’s a shell game, leading to long term decline or even worse, an unexpected period of elevated inflation, requiring a rapid rise in interest rates.  Housing remains at risk in this situation (Norway does not have 30 year fixed loans, most people float monthly). 

I am in no position to stop them from making trips to Thailand, fruit from Spain and iPhones from California more expensive, but at least I can share my knowledge with others.

The dashboard, above, lines up key figures, showing how low rates drive inflation, gradually eroding public wealth. It is important to notice that inflation is much higher than interest paid at the bank, punishing responsible behavior. A person’s savings diminishes over time in terms of purchasing power. In layman’s terms, prices of what you need go up faster than what the bank interest compensates, losing money over time. This is done to encourage (coerce) spending and investment.

This is great if you have rapidly rising productivity and economic growth but could be a trap if you borrowed money on depreciating assets.

Central Banks, around the world, share a common mandate: maintain price stability. Price stability maintains the public’s trust in the monetary and banking system. Norges Bank is no different.

Norges Bank’s 2014-2016 Strategy Document Review

On the Central Bank’s website, there is an interesting document.  Oystein Olsen outlines the path from late 2013 to 2016, highlighting (in quotes with my response after):

  • “Norges Bank’s communication will feature transparency, predictability and accountability” 

Norges Bank, like all western central banks, makes it easy to get information.

  • “Norges Bank will help set the standard internationally”

If the standard is to devalue currency as fast as possible while destroying economic growth, they are excelling.

  • “Norges Bank will make prudent and responsible use of its resources”

Buying London real estate, regardless of risks and elevated asset prices, is not responsible investing. London, is highly dependent on the finance sector. If BREXIT doesn’t come this year, it will happen eventually since European Federalization is not sustainable.

  • “We will update our understanding of how the economy and monetary policy function”

Since 2013, cutting rates does not promote economic growth. It just makes life more uncertain as more people come to realize interest rates below the rate of inflation is not sustainable. Japan and the ECB demonstrated that stimulus and negative rates do not help either. It just makes people more nervous.

  • “Norges Bank will analyze and counteract imbalances in the financial system”

It appears the coming “reactionary” force in the future to cope with an “unexpected” surge in inflation will be devastating, pushing up monthly payment obligations while killing growth.

  • “Norges Bank will continue to be well prepared for financial crises”

They have yet to allocate make a gold allocation, safeguarding the fund against unforeseen events.

  • “Norges Bank will promote an efficient money market”

Devaluing currency and driving inflation will drive people to barter instead of using the banking system.

  • “Norges Bank will promote a robust and efficient payment system”

Norway is the easiest place, in the world, to make payments. Vipps is the future of payments. However, people need to trust that Central Banks will maintain price stability, especially with electronic based currency.

  • “The fund’s distinguishing characteristics will be used to obtain the highest possible return”

NBIM continues to edge the benchmarks. However, we hope that when benchmarks make negative returns that NBIM is not celebrating by being less negative. They need to aim for always positive returns. Past performance does not always predict future returns, especially in the asset management business.

  • “The fund will spread its risk across markets and asset classes”

Their allocation remains rather traditional: stocks, bonds and real estate. Perhaps they should consider domestic investments that enable future economic growth and make housing affordable. If Norway followed my advice earlier this year, allocating to gold, they would have propelled the NAV even higher:

  • “A respected, transparent and responsible investment manager”

Although the fund continues to do a good job, beating benchmarks, the risks in the global economy continue to mount. I am very skeptical that those working at Norges Bank and in Parliament are intellectually and emotionally equipped to handle a sudden currency crisis. I don’t see them using it as an opportunity to re-invent the system but instead just pull and push traditional levers, interest rate policy and money supply, until they break, exacerbating the problem. What is different this time than in 2007/8 is the oil. It is no longer a scarce resource but an abundant commodity, made so by technological innovation. This happened before with aluminum and salt.

Globally, we are seeing a bias towards rate cuts and stimulus, seen by many as measures of desperation. Even some in Fed are calling for NIRP (negative interest rate policy) and more stimulus. If Norges Bank aims for respect, they, instead acting like the rest, should make bold moves, based on universal truths. Admit that there is a problem with asset bubbles, engineering a soft landing, rebalancing the economy. This will allow it to move forward in a sustainable manner, which is in line with Nordic tradition and culture.

* * *

Potential Outcomes:

Based on the ECB’s recent actions, firing the monetary bazooka, and considering the risks to the Norwegian economy, primarily the housing market, these are the following outcomes: 

Cut Rates: Most Likely

All indications point to a cut on March 17th, 2016. This is the quickest way to stimulate the economy, lowering people’s loan payments, giving them more to spend. Hence this is an inflationary move. This move also devalues the currency, boosting exports and gold prices. We have already seen this hold true since 2013. The effect was so strong that gold even went up in NOK terms while moving down in dollar terms. Mostly, this move helps support housing, in NOK terms, postponing the crash.

However, the “wealth effect” could be dampened if they decide to save, buy used goods or imports. People generally save money when they cannot see a positive future outlook. Although the mainstream propaganda states that 2017 will be a good year. It doesn’t seem like people are believing it, indicated by the GDP growth figures. I am curious what happens when the severance package and NAV (Norwegian unemployment insurance) money wears off.

Leaving Rates Unchanged: Likely

They may leave rates unchanged, having a change of heart about the effects of accelerating inflation and falling NOK. However, the vectors will remain intact. Although inflation is rising, GDP growth is slowing, stalling the economy.  This move would change perception, strengthening the NOK, moderating supply side inflation. However, Norwegian government and industry would have to make some bold moves to cover the losses from the oil sector.

Raise Rates: Highly Unlikely

This action, along with a “controlled crash” plan (discussed in one of my earlier stories), dealing with the inevitable recession, would be the most responsible move. The Norwegian government, in effect, would admit that there is a problem with misallocation of assets, done by encouraging deficit spending. Rebalancing the housing market would not only kill the worry associated with having high debts on unsustainably low interest but also stimulate other parts of the economy with the freed up cash, leading to new innovation and businesses. 

Stimulus: Possible

This will happen, in effect, by the government drawing from the oil fund to fill budget gaps. The Norwegian government already stated that they will increase public spending, boosting the economy. This will create inflation which will have to, eventually, be counteracted with rate hike, making housing at current price/income ratios a very risky proposition.  They may increase money supply to mitigate the currency strengthening, associated with spending the sovereign wealth fund. NBIM’s investments are mostly denominated in USD and EUR, requiring them to buy back NOK for domestic spending. This has the “undesired” effect of currency strengthening, dampening exports. Expecting the unexpected is the norm.


People, in order to spend, want a predictable future, not a volatile one associated with low rates and stimulus. We can expect more cocaine and heroin from all Central Banks in the near term. There is nothing we can do except buy gold (gold is an investment in inflation), invest in dividend paying export related stocks and keep cash on hand, taking advantage of arbitrage opportunities, presented by those who are over-extended. They, like all other central banks, will punish responsible behavior, savers and investors, and reward irresponsible behavior, gamblers and speculators.