A brief historical background
The central bank of Norway popularly known as the Norges Bank was formed soon after the separation of the country from Denmark in 1816 (Apergis Apergis et al. 2015). Shortly after the division, the bank was formed after joining Sweden through an act of parliament. On the onset, the country’s monetary unit was known as Speciedaler and Skillings (Apergis et al. 2015). However, the currency was changed through another act of parliament, and it was given the name Krone.
This was in preparation for Norway’s entry into the Scandinavian Monetary Union that was established by Denmark and Sweden in 1873 (Apergis et al. 2015). On 1st January 1897, the Norges headquarters offices ware moved to Oslo although they were temporarily transferred to London in 1940 due to the world war (Born, Ehrmann & Fratzscher 2014).
Norwegian central bank’s interventions
The Norges Bank has decided to pursue the unsterilized intervention to influence the country’s currency exchange rates. In this intervention, the bank aims to improve the exchange rate by increasing the demand for foreign currency. By doing so, the bank intends to influence the foreign currencies prices to go up (Bjønnes et al. 2014). This will cause the exchange rate to reduce significantly.
The bank’s intervention rate has been 1.5% since the year 2012 in a deliberate effort to strengthen the Krone (Bjønnes et al. 2014). By increasing the current interest rates, the Norges banks will encourage exportation and increase the amount of foreign currency in the country. The rising demand for foreign currency will maintain a stable currency price in the economy. Nonetheless, the local investors and homeowners with large mortgages will be greatly affected by the high monthly rates as a result of higher interest rates.
Interventions by the Norges bank do not have a standard frequency, but whenever there is a financial need to intervene, the bank is quick to act. For instance, the current policy by the Norges bank to increase interest rates is in response to a looming financial catastrophe. There is a risk of inflation if the current low-interest rates remain in place. Low-interest rates encourage investments, especially in real estates and mortgages (Chaudron & de Haan, 2014).
Ultimately the rate of inflation rises, and the value of the local currency may worsen, hence the central bank’s swift intervention. The main aim of this intervention is to maintain the value of the local currency at a reasonable and a fair rate. In addition to this, the central bank is also wary of a possible inflation rate that could be disastrous to the economy in general.
Implications of the Norwegian central bank’s intervention
With the increase of interest rates, the Norges bank will discourage importation as the high exchange rate will be high for the local importers. However, exporters will be the main beneficiaries of this intervention (Stenfors, 2014). A weaker Krone gives exporters an advantage since they will be selling their products using the local currency. The exchange rate will be high hence creating an export advantage. Nonetheless, this intervention is important to avert the implications of inflation to the economy. The bank’s response is timely and precise to tackle the looming financial calamity that is expected if the low-interest rates remain the same.
References
Apergis, N., Christou, C., Payne, J. E., & Saunoris, J. W 2015, ‘The change in real interest rate persistence in OECD countries: evidence from modified panel ratio tests’, Journal of Applied Statistics, vol.42, no, 1, pp. 202-213.
Bjønnes, G. H., Holden, S., Rime, D., & Solheim, H. O. A 2014, ‘Large versus Small Players: A Closer Look at the Dynamics of Speculative Attacks’, The Scandinavian Journal of Economics, vol.116, no, 2, pp. 506-538.
Born, B., Ehrmann, M., & Fratzscher, M 2014, ‘Central bank communication on financial stability’, The Economic Journal, vol.124, no, 577, pp. 701-734.
Chaudron, R., & de Haan, J 2014, ‘Dating banking crises using incidence and size of bank failures: Four crises reconsidered’, Journal of Financial Stability, vol.1, no, 15, pp. 63-75.
Stenfors, A 2014, ‘LIBOR deception and central bank forward (mis-) guidance: Evidence from Norway during 2007–2011’, Journal of International Financial Markets, Institutions and Money, vol.1 no, 32, pp. 452-472.