Rising Money Market Rates Are Causing Trouble for Norges Bank

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Just as the oil crisis is easing, Norway’s central bank is being confronted by a restive money market.

The three-month Norwegian interbank offered rate, or Nibor, is stubbornly edging upwards even as the central bank is widely anticipated to keep its key policy rate unchanged at a record low on Thursday. And with signs the economy is turning the corner and house price growth continuing unabated, Norges Bank may need to turn to means other than an another rate cut to bring money market rates under control.

The spread of Nibor, used as a benchmark for mortgage rates and corporate bonds, to the deposit rate has ballooned since March as U.S. regulations covering prime funds due to be implemented in October have pushed up lending rates.

The central bank has anticipated a Nibor spread of about 40 basis points at the end of September, according to its June monetary policy report. That gap is now closer to 60 basis points, increasing pressure on the bank to act.

One way would be to tinker with the reserve target to limit widening margins, especially since liquidity has worsened, according to Danske Bank.

“The world has changed since 2011 and NOK liquidity is tight relative to peers,” Kristoffer Kjaer Lomholt, an analyst at Danske Bank in Oslo, said on Tuesday. “Norges Bank could therefore consider adding more liquidity directly into the market and/or change the reserves target.”

That in turn could also help policy makers keep control of the krone, which they have been seeking to hold down to stimulate growth.

“Lower interbank rates in Norway would naturally be a near-term negative for the NOK”,” he said.

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