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According to Norges Bank Watch 2024, Norges Bank's communication on interest rates was effective, but the Bank underestimated the inflationary pressure and overestimated the strength of the Norwegian krone - writes the Norwegian Business School (BI) on its website.
Norges Bank missed currency forecasts
The analysis showsthat the Bank's communication in 2023 was effective and the market well understood the decisions regarding interest rates. At the same time, it is clear that the Bank underestimated the resilience of the real economy and inflation pressure, while overestimating the strength of the Norwegian krone.
Norges Bank Watch 2024 analysis
- Although Norges Bank missed its currency forecasts, the analysis taking into account different long-term economic contexts performs better. As the exchange rate plays a major role in inflation, it may therefore be useful to use several risk and scenario analyzes to make monetary policy decisions more robust. Norges Bank points out that the risk premium is an important factor shaping the exchange rate. Cause analysis risk premium changes will be useful to better understand the exchange rate, and have long been requested by various market analysts.
- The updated calculations indicate that the Bank takes this into account better in its analyses international events. However, based on our simple model, we can still predict changes in interest rate decisions using international indicators. In other words, Norges Bank appears to be reacting slightly slower to events in other countries, which has contributed to the co-cyclical nature of interest rate setting in 2023.which has made the interest rate setting in 2023 co-cyclical.
- Consistent with points 1) and 2), our simple model shows that the interest rate should have been raised faster and earlier in 2023, thus peaking earlier. This pattern of response is consistent with the Bank's alternative, simple interest rate policy. Perhaps the reason for the slowdown in the work of the monetary policy committee was the fear of a sharp deterioration of the economic situation in the Norwegian economy. But when the economic downturn was over, unemployment remained high, and at the same time, as the krona weakened, a slightly more aggressive interest rate appeared and a reaction to the indicator would be possible.
- Norges Bank deserves credit for again including quantitative measures of uncertainty in its analyses. In the future, it is desirable to conduct this type of analysis more often in combination with more formal risk analysis and scenario analysis methods regarding the impact of alternative assumptions on the setting of interest rates. It is particularly important to assess the effects of structural changes taking place in Norway, which Norges Bank indicates as important factors shaping the krone exchange rate, such as productivity growth and changed structures and risk appetite on the capital market.
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The Ministry of Finance partially uses the analysis in its report to the Storting
Every year the Center for Monetary Economics in Handelshøyskolen BI establishes an independent group of experts to assess Norway's monetary policy. The Ministry of Finance partially finances the work and uses the analysis in its annual report to the Storting on financial markets.
You can read the full 2024 report here: https://www.bi.no/globalassets/forskning/centre-for-monetary-economics/nbw/nbw_2024_main.pdf
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Source: Handelshøyskolen BI, Photo: pixabay
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