Higher credit growth

Norwegian credit growth was higher than expected in March, adding to the probability that Norges Ban

(10.05.2011) Norwegian credit growth was higher than expected in March, adding to the probability that Norges Bank will hike the signal rate on Thursday. Today Norwegian inflation for April is due. Tonight Chinese inflation for April will be released.

By Knut A. Magnussen, Senior Economist at DNB Markets

Norwegian credit growth rose more than expected from 5.9% in February to 6.3% in March. The upward trend for credit to enterprises which has been evident for a while seems to continue. Credit to companies rose from 2.9% y/y in February to 3.7% in March. In addition household credit growth rose from 6.6% to 6.9%.

We are not surprised as housing prices have been growing strongly for a long time, rising by an average of 1.1% per month for the past seven months. We believe that limited supply, rather than solid demand, is the main driver behind this upturn. Historical experience has shown that higher house price growth feeds directly into higher credit growth albeit slowly. Hence the acceleration from February to March was strong and should make the central bank more worried. Hence, we think the data are another argument for a rate hike on Thursday.

The release yesterday gave, however, no market reactions as the market is already pricing in a high probability of a hike.

Today inflation for April is due. It is expected that headline inflation will stay unchanged at 1.0% and that core inflation (CPI-ATE) also will stay unchanged at 0.8%. Even if inflation should turn out to be somewhat higher than expected, current inflation would still be an argument for delaying the monetary tightening. On the other hand higher wage growth this spring is likely to lift inflation in coming years and this is more important to the central bank.    

After the record high Chinese exports growth in March (36%), the growth rate slowed somewhat to almost 30% in April. Imports increased (less than expected) by “only” 22%. Hence the trade surplus increased to the highest level in four months. The surplus reached 11.4 bill USD, four times higher than expected and also surprising in the light of the deficit in Q1.

The data illustrated well one of the challenges between the two economic powers US and China at the start of their summit in Washington which started yesterday. Nevertheless the two delegations sent out a message that they agreed to work to boost global growth.

The coming night a row in Chinese data will be released. Inflation for April will by far be the most important. Chinese authorities have for a while been tightening monetary policies by hiking interest rates, raising the reserve requirements and letting the yuan appreciate due to high inflation. It is expected that the inflation rate will slow from 5.4% in March to 5.2% in April. If inflation surprises on the upside, this will probably be negative to the markets. Besides inflation, data for investments, industrial production and retail sales are all due tonight. It is expected that the fairly high growth rates will stay high.  

Once again Greek government debt was downgraded yesterday. S&P took the rating down from B to BB-, the reason being that higher risk of restructuring. The European authorities are trying to avoid a restructuring, even though most analysts (ourselves included) believe that this will be necessary. The EU commissioner Mr Rehn yesterday said that the Commission rather would reduce interest rates and avoid a restructuring.

The Irish wish for lower rates has so far been hampered by Germany and France. Furthermore one of the German vice men said that a solution to the European debt crisis should be found quickly. Long government yields rose further in the crisis countries and Greek 5 year yield reached the sky high 22%. The market reacted elsewhere by selling European equities, buying German government bonds (“flight to safety”) and by selling the euro.

The EURUSD was traded as low as 1.4260 yesterday evening, but the euro has recovered somewhat overnight. The main European stock indices all fell yesterday, ie the German Dax was down a good 1%. The crude oil price picked up after the strong drop last week. The lower level and the depreciation of the USD may have spurred new interests. The Brent spot is now trading at around 115 dollar a barrel.