Chief Economist Elisabeth Holvik in Sparebank 1 Gruppen is out with a new monthly report and discuss here whether Norges Bank should cut interest rates to zero or negative.
– The effect of lowering interest rates to zero or negative is twofold . Firstly a weaker krone, and secondly lower money market rates – and thus lower lending rates to customers, she writes.
The greatest risk in private consumption
Holvik shows that the European Central Bank ( ECB) at its last monetary policy meeting decided to announce measures to improve banks’ access to loans, so that they in reality are now paying banks to lend to customers.
– We believe Norges Bank could take a lesson from the ECB and increase measures to improve lending to businesses, rather than unilaterally lower interest rates. Back of lowering interest rates further would be to increase debt and house prices even more. It’s unfortunate. The Norway needs in a demanding restructuring phase is venture capital to companies and entrepreneurs who wish to pursue. Even lower mortgage rates is not the medicine for it, she states.
According Holvik is consumer spending – which makes up 50 percent of GDP – the greatest risk factor for the Norwegian economy.
– The belief in the Norwegian economy has not been lower than since the crisis in the 1990s. Continuing this trend, consumer spending will be even lower, and the Norwegian economy risks a sudden stop. Pressed we then increase to spend more oil money from the state budget. Should the government be tempted to increase spending, it should then in that case only be used for specific temporary measures, and measures that can help startups and activity in the areas along the coast that are hardest hit.
Interest rate cuts and increased savings
chief economist focuses on Norges Bank’s many rate cuts have not helped to speed up consumption, on the contrary the savings rate has risen from a low point around zero in 2008 to almost 10 percent today.
Holvik addresses a Staff Memo, as the central bank published along with background information to the monetary policy meeting. Here Norges bank analyzes several factors for why saving has increased, despite lower interest rates.
– If households are uncertain about jobs, an increase saving. This type of savings is called uncertainty savings (or anxiety savings), and according to research cited in the note, job insecurity explain some of the increase in the savings rate after 2008, she continues.
High debt amplifier according to chief economist uncertainty savings.
– the debt burden of Norwegian households is now at historically high levels, after the debt has risen faster than income since the late 1990s. Studies show that households with high debt had higher savings than the average. If households believe that the current low level of interest rates is a temporary phenomenon, so there will be another argument for increasing savings and repayment of debt, now when interest rates are low, writes Holvik.
– Access to capital is critical
She emphasizes that it is absolutely critical going forward to ensure access to venture capital to invest in restructuring and creation of businesses.
– the export sector itself is doing what they can to reduce costs, and many has been willing to cut salaries to retain jobs, she points out.
Holvik highlights an example from home, where it has been established part new industries related to fisheries and aquaculture.
– Earlier this year, a fishmeal factory established, after investments of a few hundred million. It is the first time since World War 2 that it has opened a new fishmeal plant in Norway. It is more efficient than the old, but if one looks at tax receipts and payroll capabilities from the factory, so is far from what we know from the oil sector.
– Around 20 jobs have been created, but at a far lower wages. The ripple effects for the local community is huge, with arrivals of boats, supplies and maintenance. Such investments will be possible in many communities around Norway about interest rates and the exchange rate remains at current levels for a considerable period, writes chief economist at Sparebank 1 Gruppen.
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