Friday, December 12, 2014

Norges Bank Not Worried About Rising Home Prices

I actually think Norges Bank is factoring in a very high probability for a recession in 2015 (Olsen basically said it out loud, "severe downturn"), so I don't understand the current fuzz about higher home prices and Norges Bank having abandoned their push for lower household credit growth. They must think that they will get lower credit growth anyway, and the rate cut is actually aimed at softening the expected fall in lending to businesses and households.

The Norwegian Krone has already fallen so much, so fast, that I don't see this 0.25 per cent cut had that much to do with lowering the exchange rate. From any non-short-term exchange rate point-of-view, it didn't really matter if they cut now or in March 2015. Had they not cut now, it would have been more likely that they cut 0.5 per cent in March. That would have been, at least partly, reflected in market expectations.

The timing of the rate cut matters much more for private sector credit growth, and this cut is about conveying a message of looser monetary policy to that sector, to keep the credit growth from following the outside temperature too closely now that winter is coming (it's +1 degrees in Oslo today...).

It's time to wake up to reality: Norges Bank is not anymore worried about rising home prices. If anything, they are worried about falling lending -- both demand and supply-driven-- to businesses and households, and eventually falling home prices.

As Keynes knew, "animal spirits" play a much bigger role in business investment decisions than any interest rate changes Norges Bank is able to create from an already low level. So we can expect that household lending is the area that is affected the most by this rate cut. But really, do they believe such a small cut would offset the effect of negative psychology, witnessed in steeply falling consumer expectations (in Norwegian, but see graph)? I think we are seeing here again the mental model many Norwegian economists have managed to build in their heads: Home prices just can't fall.


  1. First time I come across your blog, and nice it is to read some thoughts that go against the maintream economic analysis you find in DN and the main norwegian media outlets.

    Maybe it's due to my personal situation, as an EU worker sending money home every month, but I'm extremely worried by the fall in the krone.

    I understand the rationale with Norges Bank comfortably supporting this and most economists agreeing this is a good "cushion" to offsett a fall in investments and sharp decline in the oil sector, but there is a level beyond which a low currency will actually be unhealthy for the Norwegian economy!

    A couple of days ago in DN they were talking of 9-to-1 to the Euro as a kind of upper limit that no-one had seriously envisaged before. In the last 24 hours, the krone lost 25 √łre againt the Euro, again, and is not trading at 9.17. That's a 2,25% fall in one day.

    Where's the limit? are we going to see 10-to-1 within a few weeks, or even days?

  2. You are right that Norges bank is not using the monetary policy to regulate the housing market. Instead they rely on other macroprudential measures such as LTV cap, tightening of mortgage loan requirements, etc., which they seem to be successful at (for the moment).