FINANCIAL MARKETS AND NORGES BANK'S OPERATIONS(1).

• Position: Statistical Data Included

1 SUMMARY

The Federal Reserve has raised the Fed Funds rate on two occasions, while the Bank of England has raised its repo rate once and the central bank of Denmark has lowered its repo rate since the June Economic Bulletin. Yields on 10-year government bonds in Japan and Germany have increased. The euro weakened in the first half of 1999, particularly against the US dollar, but rebounded in July. The euro then weakened slightly during August and September.

The Norwegian krone has weakened by 0.5% against the euro. The exchange rate has ranged between NOK 8.05 and 8.38 against the euro. The trade-weighted index has moved down by 1.4%.

The yield curve in the money market has flattened since the June report. While nine- and twelve-month rates remain basically unchanged, rates for maturities of up to six months have fallen. The money market indicator has moved down 0.7 percentage point to 6.4%. On 8 September, the three-month interest rate differential against the euro was 3.3 percentage points, ie 0.5 percentage point lower than in June. The yield curve in the bond market is still slightly upward sloping and has steepened since the last report. The yields for the various maturities have increased by between 0.5 and 0.8 percentage point.

Bank interest rates were reduced in the second quarter of 1999. The interest margin widened somewhat as lending rates declined slightly less than deposit rates. Life insurance and mortgage companies also lowered lending rates, while state lending institutions raised their lending rates.

The indicator for twelve-month growth in private and municipal sector gross domestic debt (C2) is estimated at 7.0% at end-July. Year-on-year growth has levelled off and has remained at about 7% since the end of the first quarter of 1999. Annual growth in the money supply (M2) increased from 5.1% to 7.7% from end-March to end-July.

2 FOREIGN EXCHANGE AND MONEY MARKETS AND NORGES BANK'S OPERATIONS

2.1 Foreign exchange market

The Norwegian krone has depreciated by 0.5% against the euro since the last report. The krone exchange rate against the euro fluctuated between NOK 8.05 (5 July) and NOK 8.38 (29 July). The trade-weighted index has weakened by just over 1.4%.

The weakening of the krone occurred at a time when there was growing interest in the euro in foreign exchange markets. The krone rebounded moderately towards the end of July and in August.

Table 2.1 shows movements in banks' total foreign currency transactions in 1998 and so far in 1999. Norges Bank has purchased foreign currency from banks equivalent to NOK 2.8bn this year up to 27 August. These purchases must be seen in connection with the accumulation of capital in the Government Petroleum Fund. Norwegian banks have made spot currency sales to the foreign sector equivalent to NOK 10.7bn and forward currency purchases from the foreign sector equivalent to NOK 1.5bn. Banks' spot currency sales can partly be seen in connection with a reduction of NOK 13.7bn in the foreign sector's holdings of VPS-registered equities (equities registered with the Norwegian Central Securities Depository). The foreign sector has increased its holdings of VPS-registered bonds by NOK 9.9bn in the same period.

Table 2.1 Transactions relating to Norges Bank's exchange market transactions(1) In billions of NOK

1998(2) 1999(3) A. Norges Bank's net sales of currency to banks 11 -2.8 1. Spot 11 -2.8 2. Forward 0 0.0 Used by banks to provide cover (offsets): B. Foreign(4) 10 9.2 1. Spot -15 10.7 2. Forward 25 -1.5 C. Norwegian sectors, non-bank(4) -13 -20.9 1.Spot 20 -8.7 2. Forward -15 -5.1 3. Increase -18 -7.1 D. Other 14 8.8 Memorandum item: Norges Bank's international reserves 142 140.6(5) (1) For further details, see Table 48 in the statistical annex.

(2) Based on figures from the Bank's statistics.

(3) Weeks 1-34.

(4) positive figures denote foreign exchange sales from banks. Negative figures denote purchases.

(5) End-July.

Source: Norges Bank

Banks' spot currency purchases from Norwegian customers came to NOK 8.7bn and forward currency purchases to NOK 5. lbn. The banks also increased their net currency claims on Norwegian customers by NOK 7. lbn.

Norges Bank's international reserves amounted to the equivalent of NOK 140.6bn at end-July 1999, and the value of the Government Petroleum Fund came to NOK 178. 1bn.

2.2 The money market and Norges Bank's operations

Interest rates

The money market yield curve has flattened out since the last report. The yields for maturities up to six months have fallen, while nine- to twelve-month rates remain largely unchanged. One-month money market rates have dropped by 0.7 percentage point. The fall for the shortest maturities began after Norges Bank reduced its key rates by 0.5 percentage point on 16 June. The deposit and lending rates are now 6.0% and 8.0% respectively.

The money market indicator (an average of yields for maturities of one week to three months) has fallen by 0.7 percentage point to 6.4%.

On 8 September, the interest rate differential against the euro (effective three-month) was 3.3 percentage points, ie 0.5 percentage point less than at the time of the June report.

Money market liquidity

Norges Bank influences money market rates by using its key rates to set a corridor for interest rates, ie banks' interest rates on sight deposits in Norges Bank (deposit rate) and the interest rate on overnight loans to banks (overnight lending rate). Norges Bank can influence interest rates in the money market within this interval through the supply and withdrawal of krone liquidity.

In June, the daily liquidity surplus in the money market was on average NOK 6.8bn. In June, there was a need for liquidity, which was supplied to banks in the second half of the month through the issue of two fixed-rate loans (F-loans) at rates of 7.15% and 6.65% respectively and two repurchase agreements at a rate of 6.05%. There was surplus liquidity in the banking system towards the end of the month, which was withdrawn through a fixed-rate deposit (F-deposit) at a rate of 6.22%.

In July, the liquidity surplus in the money market was on average NOK 6.1bn. There was a large surplus of liquidity in the first half of July before Norges Bank intervened in order to influence liquidity. Liquidity was withdrawn through four F-deposits at rates between 6.16% and 6.22%. In mid-July there was a need for liquidity which was supplied through 3 repurchase agreements, adding just under NOK 6bn daily from 20 July to 31 July. The rate for these repurchase agreements was 6.05%. However, the amounts were not sufficiently large and there was a need to supply more liquidity through unsecured F-loans. In the last half of July, a total of six F-loans were issued at a rate of 6.65%...