Currency Wars: Norway Stands Ready To Cool Krone (Feb 2013)


Source: Bloomberg – Norway Ready to Use Rate Cuts to Cool Krone, Olsen Says

Notable excerpts:

Norges Bank is ready to cut interest rates further to counter krone gains that interfere with the inflation target, Governor Oeystein Olsen said.

““If it gets too strong over time, leading to inflation that’s too low, we will act,” Olsen said

Policy makers around the world are discussing how to respond to a re-emergence of so-called currency wars as finance ministers from the Group of 20 gather in Moscow. Norway’s central bank governor has shown before he’s willing to deploy rates to cap excessive krone gains, cutting the benchmark by 0.75 percentage point in two moves starting in December 2011.

Olsen and his colleagues are torn between protecting exporters through lower rates that stem krone gains, and a policy that addresses an overheated property market. Western Europe’s largest oil exporter, which boasts the biggest budget surplus of any AAA rated nation, has emerged as a haven from the euro area’s debt crisis.

A pronounced weakening of growth prospects, or a krone that is too strong, may over time lead to inflation that’s too low,” Olsen also said in the text of his annual speech held yesterday in Oslo. “Such development would be counteracted by monetary policy measures.

Companies such as Norsk Hydro ASA, Europe’s third-largest aluminum maker, have struggled to adjust to a stronger krone, which is pushing up export prices even as demand from Europe declines.

Olsen also said yesterday the bank has no plans to talk the currency “up or down” and no “specific” level for what too strong means.

The strength has pushed inflation well below the central bank’s 2.5 percent target, with annual underlying inflation at 1.2 percent last month.

It’s appropriate to use a few years to bring up inflation,” Olsen said. “Prices for Norwegian goods have increased considerably more than consumer prices, reflecting the improvement in Norway’s terms of trade. Incomes, output and employment are rising at a solid pace.

Norway’s politicians, central bankers and business leaders have joined forces in a push to weaken the currency. Kristin Skogen Lund, chief executive officer of the Confederation of Norwegian Enterprise, said krone gains were the “main” reason Norway’s exporters have a cost disadvantage.

The world’s fourth-richest nation per capita has withstood the euro area’s debt crisis thanks to its oil wealth. Record investment in its petroleum industry has fueled demand for workers, keeping unemployment at about 3 percent.

Low interest rates and falling unemployment have boosted private borrowing, with household debt estimated to swell to more than 200 percent of disposable incomes this year, according to the central bank. House prices, which rose an annual 8.5 percent last month, have surged almost 30 percent since 2008, almost doubling in the past decade.

Household debt and house prices are still moving up,” Olsen said. “These are the key reasons why the key policy rate hasn’t been lowered further.

The dilemma has spurred debate on the extent to which monetary policy should target asset bubbles, or whether rates are too blunt a tool.


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