Norway Forex Market

OSLO, Sept 24 (Reuters) - Norway's central bank issued the following statement on Wednesday after keeping interest rates steady.
Norges Bank's Executive Board decided today to maintain its key policy rate unchanged at 5.75 per cent.
-- There is now an unusually high degree of uncertainty linked to the turbulence in financial markets. There are wide daily swings in money market rates, equity prices, the krone exchange rate and oil and commodity prices. It is difficult to determine how long this pressure will last and the effects on inflation and activity in the Norwegian economy. It is therefore appropriate to keep the interest rate unchanged now, says Deputy Governor Jan F. Qvigstad.
-- Norges Bank is following developments closely and providing liquidity in both Norwegian kroner and US dollars to curb the swings in the Norwegian money market.
Inflation has picked up markedly since autumn 2007. Underlying inflation now seems to be a little less than 3-1/2 percent. This is higher than expected and well above the inflation target of 2.5 percent. Wages are rising rapidly and productivity growth seems to be slackening faster than previously assumed. At the same time, the krone exchange rate has weakened. There are prospects that inflation may remain high over a period ahead.
On the other hand, the crisis in financial markets has deepened. The risk of a long economic downturn abroad has increased. In Norway, there are also clear signs that economic growth is slowing. At the same time, the difference between money market rates and the key policy rate has widened as a result of the financial market turbulence, and the cost of corporate and household borrowing has increased.
ECONOMIC DEVELOPMENTS
The Executive Board placed emphasis on the following new information that has emerged since the previous monetary policy meeting on 13 August:
-- The financial market crisis has intensified. In the US, the government has placed the home loan mortgage corporations Fannie Mae (nyse: FNM - news - people ) and Freddie Mac (nyse: FRE - news - people ) into conservatorship. The aim of the conservatorship decision is to stabilise their business operations and return them to normal. The corporations own or guarantee about 40 percent of the US mortgage market. The Federal Reserve has provided the insurance corporation AIG (nyse: AIG - news - people ) with access to a credit line in amounts up to $85 billion over two years. The loan is collateralised by all of the assets of the company. Several large financial institutions have been purchased and the US investment bank Lehman Brothers (nyse: LEH - news - people ) has filed for bankruptcy. In the US, the Department of the Treasury has proposed the establishment of a fund to purchase mortgage-related assets with a high risk of default. The Department of the Treasury has asked Congress to allocate $700 billion to this fund.
-- The three-month money market rate in Norway has varied between 6.5 and 7.0 percent in the past week. Liquidity in the interbank market has at times been very tight. In particular, there is a considerable shortage of US dollar liquidity, especially during European business hours. This has resulted in wide swings and high premiums in short-term interest rates. A number of central banks, including Norges Bank, have provided US dollar liquidity to address the abnormal situation in the money market.
-- The premiums Norwegian financial institutions have to pay on credit market funding have increased further. Norwegian banks' weighted lending rate on new home mortgages with sound collateralisation has increased by close to 0.3 percentage point to almost 7.4 percent.
-- Inflation remains high in many countries, but inflation expectations in the US and Europe have receded somewhat from the high levels prevailing in summer.
-- Growth in the world economy is turning down. In emerging economies, growth is still high, but slowing.
-- Market participants now expect that central bank interest rates will be cut among most of our trading partners. In the US, market participants have priced in an interest rate cut around the turn of the year and interest rate hikes from summer next year. In Sweden, the central bank key rate has been raised.
-- Equity prices have fallen in Norway and abroad. The Oslo Stock Exchange benchmark index has fallen by 9.6 percent.
-- Oil prices fell markedly up to 16 September, but have since risen again. The spot price of Brent blend oil is $101 per barrel. The average futures price for delivery in 2009 is $107 per barrel.
-- The Economist commodity-price index has fallen by 6 percent measured in XDRs, food prices have fallen by 4 percent and the price of fresh salmon by 4 percent, while the price of frozen salmon has risen by 6 percent. Industrial metals prices have fallen by 7 percent measured in XDRs, and the price of aluminium has fallen by 10 percent. Dry cargo freight rates have fallen by 33 percent in XDR terms.
-- The krone exchange rate has depreciated. Volatility in the foreign exchange market has increased markedly. Reduced risk appetite among market participants has contributed to increased krone selling as the krone is considered to be a currency with limited liquidity. The average for the import-weighted krone exchange rate so far in the third quarter is 1.9 percent weaker than in the second quarter. Since the monetary policy meeting in August, the exchange rate has depreciated by 2.4 percent.
-- The year-on-year rise in the consumer price index (CPI) was 4.5 percent in August. Adjusted for tax changes and excluding temporary changes in energy prices (CPIXE), consumer prices rose by 3.4 percent over the past 12 months. Adjusted for tax changes and excluding energy products (CPI-ATE), consumer price inflation was 2.8 percent. Measured by a trimmed mean of the 12-month rise in the sub-indices in the CPI, inflation was 3.6 percent in August, while a weighted median showed a rise of 3.1 percent.
-- In August, seasonally adjusted registered unemployment stood at 1.6 percent of the labour force, unchanged from the previous month. According to Statistics Norway's labour force survey (LFS), seasonally adjusted unemployment was 2.6 percent of the labour force in June (in the three-month period May-July), up from 2.5 percent in the previous month. The labour force expanded by 2000 in the same period, while employment has remained unchanged since April. In August this year, the number of non-nationals with a work permit registered by the Norwegian Directorate of Immigration had risen by almost 26,000 compared with the same time last year.
-- According to preliminary quarterly national accounts figures, mainland GDP rose by a seasonally adjusted 0.8 percent from the first half of 2007 to the first half of this year. Excluding taxes, the increase was 1.0 percent, while growth excluding both electricity production and taxes was 1.2 per cent. Growth in labour force productivity has slowed over the past year.