Norway's monetary policy diverges from other countries

The Norwegian central bank recently decided to keep the official bank rate at 0.5 percentage points. As a consequence, the tiny nordic nation will have a lower interbank rate compared to its neighbouring countries, along with most other European nations.

Many investors and financial analysts have questioned the decision, and whether it will put the nation at an economic disadvantage due to higher inflation.

Real estate and oil

The quest for financial stability is the underlying goal of the Norwegian central bank. However, it is torn by two major issues related to its energy and housing markets.

The 2014 collapse in oil prices led to an exodus of investment capital from the Norwegian oil sector, with unemployment rates hitting new highs in 2015.

Increased unemployment usually calls for a shift in monetary policies in order to stimulate the economy (e.g. by lowering interest rates). However, the picture is complicated by the housing market and other micro-economic challenges.

Real estate prices have skyrocketed over the past 5 years, hitting record highs in the major cities. With the exception of Stavanger (which was hit by the oil glut), cities such as Oslo and Trondheim has seen their prices double, if not triple over the last decade.

The ratio of income compared to living expenses has decreased, indicating that a larger portion of paychecks are used to cover basic utilities, loan payments etc.

Banks are posting record incomes

One sector of the Norwegian economy which has thrived in the current environment, is the banking industry. Companies such as DNB (Norway’s largest bank by capital investment), has posted record profits years in a row.

The consumer loan and credit card businesses have also done incredibly well, leading to a trickle-down effect on other market participants. Norwegians keep signing up for unsecured loans at a record pace, contributing to the profit making.

Various web services allow consumers to compare and sort out loan products, through different criterias. One such example, is the online financial service called Lånutensikkerhetguide.no/.

The interesting part about these companies, is that they don’t operate as conventional banks. Instead, their profits are derived from referral programs tied to financial products and whether a consumer signs up for it.

The arrival of referral programs has led to an increase in financial marketing, and thus the revenue posted by the banking sector. With the official bank rate remaining at 0.5 percent, there are few signs of a slowdown in the market.