MNI INTERVIEW: Norges Head Sees Rate Hike Despite Iran Deal

The Norges Bank’s new guidance that it would likely be "necessary to raise the interest rate somewhat further" incorporates significant uncertainty over oil prices and the U.S.-Iran Memorandum of Understanding, Governor Ida Wolden Bache told MNI.

Speaking after the Bank's Monetary Policy and Financial Stability Committee kept its policy rate unchanged at 4.25%, Wolden Bache said updated forecasts in the quarterly Monetary Policy Report were completed before the MoU was signed, but that little substantive had changed since.

"The interest rate forecast in the report, and our projections more generally, are based on data up until Friday. We had already seen signs of oil prices coming down at that point, but our assessment also at the meeting yesterday was that those movements between the cut-off date and the meeting would not have affected the overall picture to any large extent," she said in an interview.

Her comments echoed those of Riksbank Governor Erik Thedeen, who told MNI on Wednesday that uncertainty persisted despite the Gulf ceasefire. (See MNI INTERVIEW: 50/50 Hike Chances Due To Iran Doubts-Thedeen)

MOVING R-STAR

Norges Bank’s annual assessment of the neutral level of interest rates, r-star, came up with a range between 2.25 and 3.75%, implying that current policy is restrictive but to an uncertain degree. The figure put into the forecast model, r-bar, based on market pricing, was edged lower.

"We have raised the upper part of the interval slightly on the basis of the new analysis. There is a tiny revision to the point forecast which we need to put into the model," Wolden Bache said. "That has not been a major consideration affecting our assessment of the restrictiveness of monetary policy at the current meeting to a significant degree.”

LIQUIDITY AND CDs

Wolden Bache was accompanied in the interview by her executive director markets, Gaute Langeland, who played down market concerns over potential liquidity shortages as Norges Bank aims at an operational target of NOK30-40 billion of fully-renumerated reserves after restructuring its balance sheet and launching a certificates of deposit programme.

The CD programme "will run with a stable volume throughout the year once it's built up to the target, and then you have fluctuations in the aggregate liquidity due to payments to and from the government accounts, which means ... after you take the structural liquidity minus the bills, we end up with something that may be both above and below [the 30-40 billion] target," he said. 

Norges Bank will run regular operations and fine tune to steer liquidity to within that target "So I have no worries ...that we do not fit into the range," he said, though he acknowledged an impact on money market pricing.

"The structural liquidity and the banks' position before our operations affect pricing in the money market. So you can see that there is a spillover from structural liquidity, the programme, to money market premiums, but I think we are well within the range where this has any sort of unforeseen results," Langeland added.

Norges Bank aims to fix the overnight-unsecured interbank NOWA rate at the policy rate, he noted.

"We want that to fix at the policy rate, which it does pretty much every day and then there are many premiums that will feed into where the three month money market rate sits. We don't have a target for that, and we think that it's a good thing that it reflects conditions in the money market," he said.