Nordic Central Banks Bow to Risk in Policy Back Track

Norway Names Olsen as Central Bank Governor
Oeystein Olsen poses in this undated handout photograph. Source: Statistics Norway via Bloomberg

Central banks in Sweden and Norway are bowing to pressure to delay interest-rate increases next year as the prospect of a global recovery dwindles and borrowing costs in the U.S. and Europe remain low.

The Stockholm-based Riksbank on Oct. 26 said faltering recoveries abroad will prevent it from raising interest rates next year as fast as it signaled in September. Oslo-based Norges Bank yesterday said it won’t raise its rate from 2 percent until the middle of 2011, compared with a June forecast for tightening to resume at the “turn of the year.”

“Low international rates are keeping Norges Bank and the Riksbank from hiking as fast as they would like to,” said Kjersti Haugland, an analyst at Norway’s biggest bank DnB NOR ASA and a former Norges Bank economist. The Riksbank will “proceed even slower than they have predicted.”

Swedish and Norwegian exports to the European Union make up about 60 percent of the countries’ sales abroad, much of that in the form of subcomponents used in products that are then shipped to the U.S. Raising rates while Europe and the U.S keep borrowing costs low would fuel currency gains and undermine those exports, which the Nordic countries rely on for half their economic output.

According to Par Magnusson, chief Nordic economist at Royal Bank of Scotland Group Plc in Stockholm, the two banks may not raise rates at all next year.

‘Wrong Direction’

“Things are going in the wrong direction in the U.S.; in the eurozone nothing is really improving, things are just snowballing so there is a huge threat,” Magnusson said in an e-mailed response to questions yesterday.

Norway’s three-month forward-rate agreements due December 2011 slipped 6 basis points yesterday to 2.695 percent and lost a further 5 basis points today. Equivalent Swedish contracts dropped 9 basis points to 2.13 percent the day of the rate announcement, and have fallen 2 basis points since.

“We still think that the risks to the” Norwegian central “bank’s growth forecasts lie to the downside and expect a slightly more gradual pace of monetary tightening,” said Ben May, an economist at Capital Economics, in a note. “But with other central banks likely to loosen monetary policy over the coming months and concerns about the health of some economies’ public finances unlikely to ease soon, the krone could appreciate further.”


The Norwegian krone slipped 0.1 percent against the euro today to 8.1410 at 2:22 p.m. in Oslo. The Swedish krona gained 0.3 percent to 9.3100 against the euro.

There will be a “slower pace of appreciation near-term” for the Swedish krona, said Carl Hammer, chief currency strategist at SEB AB in Stockholm, in a note today. Still, he expects the krona to reach 9.20 against the euro in one month, and trade at 8.75 by the end of next year.

Norway’s krone will also appreciate gradually against the euro and reach 7.80 in the first half of 2011, Hammer estimates.

Norges Bank, which last October became the first in Europe to scale back crisis easing, is now signaling it will keep “monetary policy very expansionary by being on hold,” said Katrine Boye, senior economist at Nordea Bank AB and a former Norges Bank analyst. “So right now, I would not say they are on a tightening cycle.”

While the Riksbank this week raised its seven-day repo rate a quarter point to 1 percent, as predicted by all 20 economists in a Bloomberg survey, it said “weak developments overseas” mean “it is not deemed the repo rate needs to be raised so much in the coming years.”

‘Can’t Continue’

Since it started providing numerical rate forecasts in 2007, the Riksbank revised its rate path 14 times out of 22. The bank in 2008 raised rates 11 days before the collapse of Lehman Brothers Holdings Inc., only to cut its repo rate by 2.75 percentage points the following quarter.

“They can’t continue raising rates as the interest rate spread will widen and will increase pressure on the Swedish krona,” said Tina Mortensen, an economist at Citigroup Inc., in an interview. “I wouldn’t be surprised if we see Sweden enter a slightly similar path to what we have seen in Norway.”

The Riksbank started raising rates on July 1. Since then, the world’s major central banks have signalled they may pump more money into their economies to help prop them up.

‘Close Call’

In Sweden, “we certainly could have an extended pause ahead of us if global conditions deteriorate,” said Everett Brown, European bond strategist at IDEAGlobal in London. Having the repo rate at 1 percent “would be a natural point to pause.” The bank may yet raise rates in December, though this remains “a close call,” he said.

Inflation in Sweden and Norway has lagged behind central bank targets. Norway’s underlying inflation, which excludes taxes and energy, eased 0.5 point to 0.9 percent in September, compared with the bank’s 2.5 percent target. Sweden’s headline inflation has hovered below the Riksbank’s 2 percent target since December 2008. Prices rose an annual 1.4 percent last month.

A report published by the Stockholm-based statistics office today showed Swedish consumer confidence dropped this month, while business confidence rose less than economists estimated.

“We are going to see slow growth going forward and we are going to see lower inflation as well because there is a deflationary impetus from abroad,” Magnusson said.

‘Bad Track Record’

The Riksbank this week lowered its inflation estimates for 2011 and 2012 and said there are “low inflationary pressures prevailing in Sweden during the forecast period.”

Norges Bank said inflation “has been lower than expected and is projected to remain at around 1.5 percent in the period to summer 2011. The outlook for the global economy is “highly uncertain,” it said.

The Riksbank’s October estimates are based on a 2011 economic growth forecast of 3.8 percent. The IMF, by contrast, expects Sweden’s economy to expand 2.6 percent next year.

“Historically, at least in the last four years, the Riksbank has had quite a bad track record” in forecasting accurately, said David Deddouche, a foreign-exchange strategist at Societe Generale SA in Paris, before the rate announcements. “They are really stubborn in waiting for evidence that they are totally wrong.”

Two of the Riksbank’s six board members this week voted against higher rates. “It doesn’t take much to persuade one other board member and then the aggressive hiking process is history,” said Mads Geisler at SEB AB in Oslo. The likelihood the two banks will shelve tightening next year is “risk-reward wise a good bet to take,” Magnusson said.



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