via notayesmanseconomics:
It is still early in the morning and yet the theme for today is already interest-rates. Even the country that was most committed to negative interest-rates is these days in on the game. For newer readers it held interest-rates at -0.75% for some years.
The SNB is tightening its monetary policy further and is raising the SNB policy rate by 0.25 percentage points to 1.75%. In doing so, it is countering inflationary pressure, which has increased again over the medium term. It cannot be ruled out that additional rises in the SNB
policy rate will be necessary to ensure price stability over the medium term
Actually that is something of a generic or standard statement for now with its 0.25% increase in interest-rates and the promises of what Andrea True Connection called “More,More,More”
There are a couple of things which are very Swiss though and let us start with this one.
Inflation has declined significantly in recent months, and stood at 2.2% in May. This decrease was above all attributable to lower inflation on imported goods, in particular lower prices for oil products and natural gas.
First we see that inflation in Switzerland is quite low and if we allow for any margin of error is on target. So in my home country the Bank of England would still be looking the other way. Of course the real issue is what the inflationary trends are and slightly curiously the answer is not much.
The new forecast puts average annual inflation at 2.2% for
2023 and 2024, and 2.1% for 2025. Without today’s policy rate increase, the inflation forecast would be even higher over the medium term.
However we should also note that the SNB has been quite a successful central bank through this phase as we see that the level of inflation has been relatively restrained. So let us give them the benefit of the doubt.
Moving on we get into the arena of one of the ways they have done better.
To provide appropriate monetary conditions, the SNB also remains willing to be active in the foreign exchange market as necessary. In the current environment, the focus is on selling foreign currency.
The Swiss have a strong currency which regular readers will know is one of my policy prescriptions ( because it helps with inflation). There is an irony as they spent many years trying to weaken it. But these days they seem to have changed somewhat.
and we have also sold foreign currency in recent quarters. Our monetary policy tightening has strengthened the Swiss franc and thus dampened imported inflation.
As of their March 2023 balance sheet they have built up a foreign exchange position of some 761 billion Swiss Francs. So they have plenty of ammunition although that would involve selling both Euro area bonds and US equities as this is where they invested the reserves.
Norway
If you establish a regular pattern someone will break it and we only had to wait half an hour today!
Norges Bank’s Monetary Policy and Financial Stability Committee decided to raise the policy rate by 0.50 percentage point to 3.75 percent. The Committee’s current assessment of the outlook and balance of risks implies that the policy rate will most likely be raised further in August.
Having moved by 0.5% have they hinted at more of the same?
The policy rate forecast has been revised up since the March Report and indicates a rise in the policy rate to 4.25 percent in the course of autumn.
Actually if you think that then you should raise to 4.25% as why let inflation become embedded in the system whilst you delay?
Their rationale starts in pretty much generic terms.
Inflation is markedly above the target. Wage growth is set to be higher than in 2022. Activity remains high amid continued tightness in the labour market, but pressures in the Norwegian economy are easing.
I can add a nuance to the mention of the labour market as this morning Norway Statistics have told us wages rose by 0.7% in the month of May. So maybe they have been spooked by the monthly rise especially with unemployment falling by 0.1% to 3.5%.
Plus there is an elephant in the room which unless you have been following it may come as a surprise. It does get a brief mention further down the statement.
If the krone turns out to be weaker than assumed or pressures in the economy persist, a higher-than-projected policy rate may be needed to bring inflation down towards the target.
We can see the state of play via this from The Local in May.
The krone continues to fall in value against major currencies such as the US dollar and the British pound. Analysts don’t think the situation will change anytime soon. The seemingly ever-weakening Norwegian krone has been a mainstay in the domestic press for months. In recent days, the krone has been characterised by a marked fall in value against the dollar and pound.
It has rallied by 1% versus the US Dollar this morning in response to the interest-rate move but is still some 8% weaker than a year ago. Also the main move happened last spring as it was some two big figures lower ( Krone stronger) in late March 2022.
This does beg a question though because raising interest-rates now to respond to a currency fall that mostly happened in the spring of 2022 looks like it has an element of panic about it. They did not get my past memo that central banks needed to at least match the moves of the US Federal Reserve.
The US
Yesterday the Chair of the US Federal Reserve gave evidence to Congress. As you can see below he was keen to push the message that more interest-rate hikes are on their way.
Testifying to U.S. lawmakers, Powell on Wednesday said the Fed had a “long way to go” in bringing down inflation to its 2% target and suggested the central bank may need to raise rates twice more this year – a message he also delivered at last week’s monetary policy meeting.
Although not everyone at the Federal Reserve is of the same view.
One could argue that policy may now be sufficiently restrictive, but we have not yet seen its full effects on the macroeconomy. So, let’s pause and give policy time to work and assess how rapidly it is gripping the real economy. Under this view, the bar to justify further rate hikes is higher than it was a few months ago.
That is the view of Atlanta Fed President Bostic who wants interest-rates to stick where they are. He becomes a voting member again in 2024.
Comment
I have two messages today. The first is simply where was this anti-inflation resolve back in 2021 when it could have done some good? Now we are simply stamping on the brakes and hoping for the best. Also I am often critical of central banks so let me also give some praise as so far the Swiss National Bank has seen inflation be much more contained than elsewhere.
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