Wednesday, 28 October 2009

Norway raises interest rate

Norway has become the first European country to raise its base rate (to 1.5%, from 1.25%) since the start of the credit crunch and consequent near-global recession.

Eagle-eyed Norwegian central bankers think to have detected the first signs of inflation.

As I mentioned at the time, Australia raised its rate a couple of weeks ago.

Although these are very early days, rising international rates will force the UK to raise its rates whether we have inflation in our economy or not. Money chases rates and pushes up the value of a currency. If sterling gets left behind its value will fall, making imports more expensive and exports cheaper - both these effects are inflationary, the more expensive imports especially so. The "benign" international economic environment of recent years is coming to an end. However Norway is - economically - a small nation so the effect on us is minor at the moment; an increase in the ECB or Fed rates would be much more significant.

It should be noted that although the UK base rate is 0.5%, the yield on a ten-year gilt (ie, the interest payable to those who are underwriting our national debt) is 3.7% - considerably higher than base - and rising quite dramatically over the last couple of months. This sets the bar for retail loans.


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