By Vedran Vuk
While many of our readers may not be particularly interested in Norway, two of our Casey Report investment picks are in the country – hence the quick update on the Norges Bank’s (the Norwegian Central Bank) rate decision.
Last week, the Norges Bank finally raised rates from 2.0% to 2.25%. Norway was the first European country to raise rates after the crisis, and had an initial head start. Unfortunately, the central bank took a long break from further rate hikes.
The most recent hike should be approached with caution. Either the rate hike is the first of more increases, or it’s simply a reaction to the European Central Bank’s 25 basis-point move. If the Norges Bank follows this rate increase with another 25 basis points, then this move will be cause for celebration. However, the Norges Bank might also stay at this level for a long period of time. Regardless of the ultimate decision, this is still good news.
Furthermore, notice the difference in the Norges Bank press release compared to Federal Reserve positions:
"Inflation is low. This suggests that the key policy rate should be kept low. On the other hand, capacity utilisation in the economy is rising. There are prospects that inflation will pick up over the year ahead. ‘The analyses published in March suggested that the key policy rate should be raised gradually towards a more normal level. Developments since then have been approximately as expected. An overall assessment indicates that the key policy rate should be raised now’, says Governor Øystein Olsen."
Yes, it’s true that the Norwegian inflation rate has been dropping. Nonetheless, the central bank notes that inflation could pick up in the year ahead; so it’s better to raise rates now. The attitude of the Federal Reserve is the complete opposite. Since inflation is currently low, the Fed maintains near-zero rates, and promises to aggressively combat inflation when it happens. Norway’s more responsible central bank is one of the many reasons that we choose to invest in Norway in The Casey Report.