MNI INTERVIEW: Norges Bank More Restrictive Than Implied By R*

Norway's floating-rate mortgages render its households exceptionally sensitive to the policy rate and the nominal level of interest rates matters as well as their distance from estimates of their neutral level, Norges Bank’s Executive Director of Monetary Policy Ole Christian Bech-Moen told MNI. 

"When we look at how restrictive monetary policy is … it's not only the deviation from an estimate of R-star that is part of that judgement, we think that the nominal policy rate has an impact as well on the restrictiveness of monetary policy. There are .... indications of quite strong cash flow effects in the economy," he said in an interview following a Nordea event in London.

Some 95% of Norwegian home loans vary in line with short-term money market rates, whereas most U.S. mortgages are long-term fixed, so while the Fed raised rates by more than Norges Bank in the latest tightening cycle, interest payments as a share of income rose more in Norway, according to Governor Ida Wolden Bache at Jackson Hole.

Norges Bank’s latest estimates of real R-star range between 0.25% and 1.5%, so the current 4% policy rate is slightly above the top of this range given targeted inflation of 2%. The central bank left its policy rate unchanged at its November meeting as widely expected and said that it judged policy was, and should stay, restrictive but did not state the degree of restrictiveness. (See MNI: NORGES WATCH: No Hurry For Further Cut)

Recent research has shown that high sovereign borrowing can push up on the neutral rate, and Bech-Moen stressed that, as a small open economy, global debt levels affect Norwegian R-star even though the country’s sovereign debt stock is exceptionally low. (See MNI INTERVIEW: Secular Stagnation Author Says Debt Raising R*)

"We think what's happening globally to R-star has an impact on R-star in Norway ... it's tightly linked to the global R-star. So when we're talking about productivity and term premium and these factors that we're discussing, we need to see those in an international perspective to draw implications for the Norwegian R-star," he said.

"For a long, long while we're in a better [government] debt position than other countries [but] ... on average, when we compare Norwegian rates to our trading partners we see higher rates in Norway and not lower," he said.

NO BIG INFLATION SURPRISES

Bech-Moen said inflation data since the September forecast round was unsurprising, despite a small undershoot of Norges Bank's forecasts in September, and then a slight overshoot at 3.4% the following month. (See MNI INTERVIEW: Norges Bank Head Tilts Against Precise Guidance)

"September core inflation came in 0.2 lower than in our forecast from September. And now the latest one came in 0.2 above our forecast from September. And I think these are forecasting errors that we must expect to see ... it's not unusual for us to miss by 0.2 percentage points," he said.

Volatile food prices are included in Norges' target measure, CPI-ATE.

"Food prices have been challenging to forecast, in particular because the seasonal pattern has changed, and we have seen high volatility in some food prices traded internationally."

MOPPING UP LIQUIDITY

Norges Bank is currently consulting on planned changes to its monetary framework which would lead to its issuing central bank certificates in 2026 in order to mop up liquidity.

"There has been excess liquidity for some time now, leading to low money market premia … as an example, the difference between the expected policy rate and the three-month fixing has been lower than its historical average," Bech-Moen said, adding that “more of the liquidity risk will be carried by market participants" if certificates are issued.

The change in premia could impact monetary policy, not least because of the sensitivity of households to market rates, he said.

The committee is "looking at the rates that households and businesses will face, and those lending rates are tightly linked to the money market rate ...So they will, of course, take the money market premium into consideration when setting the appropriate policy rate," he said.