Fly Hawks, Fly

We have liftoff! In Norway.

As expected, the Norges Bank hiked rates Thursday, becoming the first central bank to raise rates in the pandemic era among countries with the 10 most-traded currencies.

“A normalizing economy now suggests that it is appropriate to begin a gradual normalization of the policy rate,” Governor Oystein Olsen said. The statement went on to note that,

The reopening of society has led to a marked upswing in the Norwegian economy, and activity is now higher than its pre-pandemic level. Unemployment has fallen further, and capacity utilization appears to be close to a normal level. Infection rates have risen after summer, but a high vaccination rate has reduced the need for COVID-related restrictions. The economic upswing will likely continue through autumn. Underlying inflation is low, but increased activity and rising wage growth will help push inflation up towards the inflation target of 2%.

The Norges Bank said higher rates are needed to counter financial imbalances, but noted that “uncertainty surrounding the effects of higher interest rates” means rate hikes should be “gradual.”

“Gradual” though the hikes may be, the bank nevertheless lifted the rate path (figure below). “Based on the Committee’s current assessment of the outlook and balance of risks, the policy rate will most likely be raised further in December,” Olsen remarked.

While policymakers expressed some concern over “the evolution of the pandemic and the restraining effect that new virus variants could potentially have on the economic upturn,” they noted that “capacity constraints may result in faster-than-expected price and wage inflation.”

Still, the bank isn’t worried about runaway prices. “The risk of inflation becoming too high is limited,” the statement said.

I’d be remiss not to make the generalized observation that it’s easier to conduct your monetary affairs when fiscal policy is augmented by a massive SWF which, at last check, totaled $1.4 trillion.

Meanwhile, traders brought forward a 15bps rate hike from the BOE following Thursday’s decision, which included a 7-2 split on maintaining the government bond purchase target and a hawkish lean in the rates guidance.

“Against a backdrop of robust goods demand and continuing supply constraints, global inflationary pressures have remained strong and there are some signs that cost pressures may prove more persistent,” the BOE said. The key passage read as follows:

At its previous meeting, the Committee judged that, should the economy evolve broadly in line with the central projections in the August Monetary Policy Report, some modest tightening of monetary policy over the forecast period was likely to be necessary to be consistent with meeting the inflation target sustainably in the medium term. Some developments during the intervening period appear to have strengthened that case, although considerable uncertainties remain.

With the case for tightening thus “strengthened,” UK stocks pared gains, gilts fell and the pound rallied.

The BOE also noted that “the material rise in spot and forward wholesale gas prices since the August Report represents an upside risk to the MPC’s inflation projection from April 2022.”

Dave Ramsden switched his vote to join Saunders in calling for an end to bond purchases sooner rather than later. That served to cement the market’s perception of a more hawkish bent.

Take the above for what it’s worth. Obviously, Norges Bank decisions and BOE fortune-telling don’t make for the most compelling reading, but monitoring the gradual, global pivot away from pandemic-era monetary policy is paramount at a critical juncture for the global economy.

And yadda yadda yadda.