Last week Bloomberg TV interviewed Norway’s central bank governor, Oystein Olsen. Head of the Norges Bank since 2011, this softly spoken civil servant packs quite a punch, responsible for financial and price stability and managing the Government Pension Fund of Norway – the world’s biggest sovereign wealth fund. Timed to coincide with the bank’s decision to raise their key interest rate by 25 basis point to 1.5 per cent, the fourth increase in a year and its highest in five years, he’ll also look into why his currency’s so weak – after we’d warned on Scandinavia a million moons ago. Tellingly he said: "I think all central banks…realise the negative effects of negative interest rates and unconventional measures." Note to self: Norwegian sovereign debt of all maturities out to 10 years yield less than 1.5 per cent today.
Against the euro, the Norwegian krone has weakened continuously from 2013's 7.25 to just over 10 per euro, as weak as it was at the height of 2008’s financial crisis, which was its weakest ever. The trend has been steady yet relentless, and shows no signs of slowing down or of instability. While not predicting to infinity and beyond, we expect a move through 10, which might even be accompanied by interest rate cuts.
Another question vexing central banks this year is whether they can, and should, be truly independent. The US Federal Reserve Banks have operated independently of Congress since 1913, providing the nation "with a safe, flexible, and stable monetary and financial system" (their words). It is not universally liked, deemed efficient or successful. The Bank of England gained its independence in 1997 – and a decade later it all went horribly wrong, the first run on a commercial bank in 150 years. It, along with bigger brethren, were nationalised or bailed out. The key Bank Rate is close to rock bottom still, and anyone suggesting the economy is operating ‘normally’ is delusional; gilt yields this year hit new record lows.
Some are suggesting macroeconomic theory has been a failure, especially when used by central bankers from a predominantly academic background. As lenders of last resort, many are suggesting increased attention be devoted to actively overseeing potential bail-out candidates. A current issue in the choice for Mark Carney’s replacement, it’s also been front and centre these past few weeks at the Federal Reserve Bank of New York where the emergency discount window has been used repeatedly for hundreds of billions of dollars. Whoever borrows this much for so long has serious business issues.
Ultra-low rates and zero inflation hurt the average person, possibly the poorest suffering the most. Interest on meagre savings don’t make the blindest difference, acting as a disincentive to thrift and a savings ethos. While low rates make repayment terms more bearable, this in turn risks ever-increasing levels of debt which will never be repaid. The Student Loan Company is a great example of how bad debt builds, not forgetting that deflation increases its face value (whereas inflation shrinks it).
Perhaps today’s central bankers should read the new biography of Thomas Gresham by John Guy. With his father, they looked after three Tudor monarchs over four decades, manipulating exchange rates, settling debts, smuggling commodities and bullion to boost state coffers – becoming wealthy men in the process.
