The central banks of Sweden, the UK, Denmark and Canada and the ECB have lowered their key rates since the March Economic Bulletin. The ECB lowered its repo rate by 50 basis points to 2.5%. The euro has weakened by close to 7% against the US dollar.
The Norwegian krone has appreciated by 3.8% to NOK 8.17 against the euro. The exchange rate has ranged between NOK 8.17 and 8.48.
In view of the prospect of slower growth in the Norwegian economy and hence lower price and cost inflation, which are expected to improve the foundation for a stable exchange rate, Norges Bank lowered its key rates on two occasions, 23 April and 16 June, by a total of 1.0 percentage point. This has resulted in a fall in money market rates since the March report, with the money market indicator moving down by 0.5 percentage point to 7.1%. The yield curve in the money market is still declining, but is substantially flatten At mid-June, the three-month interest rate differential against the euro was 3.7 percentage points.
Norwegian government bond yields have risen by about 0.5 percentage point on average since the March report. The yield curve in the bond market is slightly upward sloping.
Bank interest rates were reduced from the end of the fourth quarter of 1998 to the end of the first quarter of 1999. The interest margin narrowed somewhat as lending rates declined slightly more than deposit rates. Lending rates were also lowered in life insurance and mortgage companies, but were raised in state lending institutions.
Credit growth has continued to slow, to an annual rate of 7.0% in the period to end-April. Money supply growth (M2) increased from 5.5% to 5.7% from end-January to end-April.
2 FOREIGN EXCHANGE AND MONEY MARKETS AND NORGES BANK'S OPERATIONS
2.1 Foreign exchange market
The krone has appreciated by 3.8% against the euro since the last report. The krone exchange rate against the euro fluctuated between NOK 8.17 (16 June) and NOK 8.48 (18 March). The krone appreciated fairly steadily to mid-May, then weakened slightly before rebounding.
The strengthening of the krone against the euro may partly be seen in conjunction with a sharp increase in oil prices in the period up to the beginning of May and a weakening of the euro against the US dollar.
Table 2.1 shows movements in banks' total foreign currency transactions in 1998 and so far in 1999. Norges Bank purchased foreign currency from banks equivalent to NOK 1.0bn this year to 4 June. These purchases must be seen in connection with the accumulation of capital in the Government Petroleum Fund. Norwegian banks have made spot currency purchases from the foreign sector equivalent to NOK 0.6bn and forward purchases from the foreign sector equivalent to NOK 9.3bn. Banks' spot currency purchases can partly be seen in connection with sales of VPS-registered bonds (bonds registered with the Norwegian Central Securities Depository) to the foreign sector, which has increased its VPS-registered bond holdings by NOK 12.4bn. The foreign sector reduced its holdings of VPS-registered equities by NOK 9.1bn.
Table 2.1 Transactions relating to Norges Bank's exchange market transactions(1) In billions of NOK
Norges Bank's net sales 1998(2) 1999(3) of currency to banks 11 -1.0 1. Spot 11 -4.8 2. Forward 0 3.7 Used by banks to provide cover (offsets): B. Foreign(4) 10 -9.8 1. Spot -15 -0.6 2. Forward 25 -9.3 C. Norwegian sectors, non-bank(4) -13 -8.0 1.Spot 20 -9.1 2. Forward -15 7.7 3. Increase -18 -6.6 D. Other 14 16.8 Memorandum item: Norges Bank's international reserves 142 155.2(5) (1) For further details, see Table 48 in the statistical annex.
(2) Based on figures from the Bank's statistics.
(3) Weeks 1-21.
(4) Positive figures denote foreign exchange sales from banks. Negative figures denote purchases.
Source: Norges Bank
Banks' trading with Norwegian sectors shows spot currency purchases of NOK 9. 1bn and forward currency sales of NOK 7.7bn. The banks also increased their net currency claims on Norwegian customers by NOK 6.6bn.
Norges Bank's international reserves amounted to the equivalent of NOK 155.2bn at end-May 1999, and the value of the Government Petroleum Fund came to NOK 167.5bn.
2.2 The money market and Norges Bank's operations
Money market rates have declined since the March report. This is in large part due to the overall reduction of 1.0 percentage point in Norges Bank's key rates on 26 April and 16 June. Norges Bank lowered its deposit and lending rates by 0.5 percentage point on both occasions in view of the prospect of slower growth in the Norwegian economy, and hence lowerprice and cost inflation. The deposit rate and lending rate are now 6.0% and 8.0% respectively.
The money market indicator (an arithmetic average of effective euro rates with maturities of one week to three months) has fallen 0.5 percentage point to 7.1%. The money market yield curve is still downward sloping, but has flattened out considerably. At 16 June, the interest rate differential against the euro for three-month maturities was 3.7 percentage points, ie approximately the same as reported in the March 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 influences interest rates in the money market within this interval through the supply and withdrawal of krone liquidity. Norges Bank also counters seasonal variations in banks' liquidity associated with government incoming and outgoing payments through the Bank's liquidity policy instruments.
In March, the liquidity surplus in the money market was on average NOK 6.3bn.
In the second half of March, Norges Bank repurchased F-deposits for a small amount, while the Bank supplied liquidity through two repurchase agreements at a rate of 7.05% and through two F-loans at a rate of 7.55%.
In April, the liquidity surplus in the money market was on average NOK 8.5bn. Liquidity was tight before Norges Bank supplied liquidity, particularly in the latter half of the month. Liquidity was withdrawn through an F-deposit at a rate of 7.23%. Liquidity was supplied through 7 repurchase agreements at rates between 6.55% and 7.05%, and through 7 F-loans at rates between 7.15% and 7.55%. In order to promote banks' increased use of repurchase agreements rather than unsecured credit until 1 September, from which time F-loans will be collateralised, the mark-up on F-loans relative to repurchase agreements was raised from 50 to 60 basis points.
In May, the liquidity surplus in the money market was on average NOK 8.6bn. Liquidity was tight before Norges Bank supplied liquidity through 5 repurchase agreements at a rate of 6.55% and 5...