Norway’s central bank may be close to splitting its benchmark rate so it can pay banks less on large deposits and channel excess liquidity back into the interbank market, Nordea Bank AB and DnB NOR ASA said.
Oslo-based Norges Bank may lower the rate it offers banks on big deposits from the current 2 percent, according to economists at Norway’s two largest banks. The central bank, which has raised its main rate three times since October and signalled a further increase at “the turn of the year,” wants to discourage banks from leaving excess funds on its balance sheet rather than lending the money to other banks, according to Governor Svein Gjedrem.
The central bank said on Sept. 22 it will announce changes to the money market next month, though it declined to comment on whether measures may include a rate split.
“The problem is redistribution of liquidity in the banking system,” said Anders Svor, assistant director at Norges Bank’s Monetary Policy Department, in an interview yesterday. “We feel that the banks are getting more passive, that they have a reduced incentive for redistributing liquidity.”
Gjedrem said in a Sept. 6 speech the bank may push through changes to discourage banks from depositing “substantial” amounts at the central bank. Tight credit flows have increased the difference between short-term money market rates and the central bank’s benchmark 2 percent rate, forcing Norges Bank to provide more liquidity loans.
Over the past year the average daily surplus liquidity deposited with the central bank has been about 40 billion kroner ($6.7 billion), or about 10 billion kroner more than the average between 2003 and 2008, Svor said.
“Norges Bank is not happy about the spread between the central bank rate and where the money market rate is fixing,” said Gaute Langeland, an interest-rate strategist at Nordea, in an interview. “They feel that a spread of 60 to 70 basis points is high; they feel that there is more liquidity in the Norwegian market now than there used to be before the financial crisis but the liquidity isn’t being distributed evenly. Banks are reluctant to distribute between themselves.”
The spread between Norway’s interbank offered rate and the benchmark rate was at 62 basis points yesterday, compared with 26 basis points at the end of 2009. A rate split is a likely option as Norges Bank wants to pay lenders less on their deposits without reversing its tightening cycle needed to guide the economy through its recovery, the economists said.
Deputy Governor Jan F. Qvigstad said the bank discussed how to change the way it steers the money market at its Sept. 22 policy rate meeting. Norges Bank may present a proposal in about two to three weeks, he said.
“It’s more structural,” Qvigstad said in a Sept. 22 interview. “The financial crisis has revealed weaknesses in the way we have organized the short-term money market.”
The bank this week allocated 40 billion kroner ($6.75 billion) of one-month loans at a 2.16 percent average rate. The auction attracted 68.75 billion kroner in bids.
By splitting the benchmark deposit rate, Norges Bank will remove the floor from the money market that has guaranteed banks a minimum return on their deposits with the central bank, Langeland said.
“In future there won’t be this floor,” he said.
Kyrre Aamdal, senior economist at DnB NOR, said introducing a lower rate for large deposits is a likely strategy of the central bank.
“Deposits over this limit will have another rate,” he said in a phone interview.
Norges Bank, which last year became the first in Europe to increase borrowing costs, was forced to scale back its tightening plans in June after Europe’s sovereign debt crisis triggered concern that austerity measures may slow the region’s recovery and sap demand for Norwegian exports.
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