MNI: Signs FX Affecting Prices Faster - Norges Bank Director
MNI (LONDON) - There are signs that the passthrough from recent krone depreciation to domestic Norwegian prices may have come through faster than in the past, helping to explain weaker-than-expected inflation, Norges Bank's Executive Director Monetary Policy Ole Christian Bech-Moen said on Thursday.
Krone weakness has been a key variable for Norges Bank in its economic analysis and policy setting, with the Norwegian central bank yet to join in the wave of rate cuts underway in other advanced economies. Norges Bank has used a suite of different models that show a wide range of possible inflation effects from the krone's depreciation, but one possibility is that the effects have come through more rapidly than anticipated, although uncertainty around this assumption is high, said Bech-Moen, who addressed a Nordea seminar in London.
"(Inflation) has come down faster than what the normal underlying drivers imply. But we don't take that and say that this is due to the fact that the FX passthrough has been quicker this time around ... We haven't taken a stand on that, but we have some evidence using our regional network, implying that businesses have passed on FX costs due to the depreciation of the krone faster this time around," he said. (See MNI NORGES BANK WATCH: Policy Held, No Change Seen In December)
CPI-ATE inflation was 2.7% Y/Y in October, below the central bank's 2.9% September Monetary Policy Report projection.
Bech-Moen also highlighted the impact of the monetary policy cashflow channel. Norwegian households' debt ratios are very high by international standards, averaging 250% of income, and the vast majority of mortgages are on floating rates, meaning that the impact of rate hikes on household finances has been large and rapid.
"Personal interest payments in Norway, of course, are higher than in the U.S. because the debt level is higher, even though the policy rate was the same ... in Norway, the cash flow channel, or the cashflow, really deteriorated for households," Bech-Moen said.
However, while household cashflows have been hit hard, household consumption has not deteriorated to an equivalent degree, Bech-Moen said, noting that isolating the effect of interest rate changes on consumption per household "is really challenging to identify.”
Norges Bank economists sorted households by debt-to-income levels and looked at effects on cashflow and consumption.
"We have hiked interest rates from zero to 4.5% so this should have a much larger negative impact on consumption in Norway than other countries," Bech-Moen said. "We do not find any evidence for that. That doesn't mean that there is no such [effect] -- there are many other things happening at the same time."
OUTLOOK LITTLE CHANGED
Norges Bank will produce fresh forecasts in December, with the impact of previous krone weakness and the softness of the real economy to the fore, but the picture appears to have changed little recently, with the central bank having signalled that its first rate cut of the cycle is likely to come in the first quarter next year.
"The outlook doesn't appear to have changed materially since we had the September report," Bech-Moen said.
The succession of previous hikes "has cooled down the Norwegian economy. It has helped to bring inflation back down," he said. With inflation having peaked around 7.5% before falling back to 2.6%, "these are moving in the right direction.”