Related News:
Norway Government Pledges to Support Low Rates, Cap Krone Gains
Norway’s government must shape economic policy to allow the central bank to shelve monetary tightening for as long as possible to avoid fueling krone gains that hurt exporters, Finance Minister Sigbjoern Johnsen said.
“If the krone gets too strong, that is worrying,” said Johnsen, 59, who will present next year’s budget on Oct. 5, in an interview in Oslo. Next year’s budget must allow for “as low interest rates as possible in a way that we don’t increase the rate difference between Norway and our main competitors.”
Johnsen’s concern that rate rises will send the krone higher than exporters can bear is shared by Oeystein Olsen, the top candidate to become governor of Norway’s central bank when Svein Gjedrem steps down in December. Olsen said last week policy makers should leave the benchmark deposit rate on hold until next summer, which is about six months longer than the bank’s current forecast suggests.
Next year’s budget will aim “not to put extra pressure on interest rates in a manner that the difference between Norwegian and international rates is growing,” Johnsen said in the Aug. 27 interview.
The world’s seventh-largest oil exporter returned to growth earlier than most other industrialized nations after petroleum investment shielded the economy from the worst of the global crisis. That allowed the central bank to start reversing its easing cycle in October, becoming the first in Europe to do so.
‘Tight’ Budget
The bank has since raised the benchmark three times, bringing it to 2 percent. Policy makers opted to shelve their tightening cycle the last two meetings after the krone’s 8.5 percent appreciation against the euro in the past 12 months hurt exporters including Europe’s third-largest aluminum producer Norsk Hydro ASA.
The European Central Bank has kept its main interest rate at a record-low 1 percent since May last year.
Johnsen said he wants next year’s budget to be “tight” even after some economists warned the risk of a faltering global recovery may require the government to use policy to support demand.
Harald Magnus Andreassen, chief economist at First Securities ASA in Oslo, says Norway needs a “neutral or even an expansionary policy” next year.
The Labor-led government is trying to return to its spending rule, which requires the Finance Ministry to limit expenditure to the return on the country’s oil fund, estimated at an annual 4 percent. It spent 4.8 percent of the $456 billion oil fund last year and plans to spend 5 percent this year. This year’s budget is expected to stimulate the economy by 0.8 percent, following a 2.1 percent stimulus in 2009.
‘Still Weak’
“If you have an economy that is still weak due to low domestic demand, moderate credit growth, low wage inflation and low inflation and you have a monetary policy that is desperately trying to push activity up with a 2 percent interest rate, then it makes no sense to tighten fiscal policy,” Andreassen said in an interview.
DnB NOR ASA, Norway’s biggest bank, cut its 2011 economic growth forecast to 2 percent on Aug. 19 from an April estimate for 2.2 percent growth. Norges Bank expects the economy to expand 2.75 percent next year.
Retail sales declined in three of the past four months through June, Statistics Norway said on Aug. 12, citing monthly changes. Credit growth was an annual 4.6 percent in June, compared with 6.8 percent a year earlier and 13.3 percent in June 2008.
Gains in the value of the krone, which is currently trading about 1 percent above its 2005 to 2009 average, according to the Finance Ministry, have already hurt exporters. Sales abroad, which in 2009 accounted for 42 percent of the nation’s output, fell 2.4 percent in the second quarter.
Johnsen said he expects Norway’s mainland economy, which excludes oil, gas and shipping, to expand “around 2 percent” this year. “We expect growth to pick up next year and this is an argument for us to be prudent on the fiscal side.”
The government estimates 2010 economic growth at 2.1 percent in its latest set of forecasts. It has yet to provide predictions for 2011.
To contact the reporter on this story: Josiane Kremer in Oslo at Jkremer4@bloomberg.net
Rate These Stories
Rate this Page