Norway central bank Governor Oeystein Olsen is signaling a willingness to tolerate more weakness in the krone, among the worst-performing currencies of the past year, even if that causes inflation to accelerate.
The krone plunged yesterday by the most in a year after the central bank said it’s ready to cut interest rates for the first time since March 2012 to protect western Europe’s largest oil producer from an investment slump. As the currency lost as much as 2.3 percent against the euro and 2.1 percent versus a basket of its most-traded peers, Olsen said he was aware the bank’s comments surprised markets “a bit.”
The risk of krone losses driving inflation 0.5 percentage point higher than the central bank’s 2.5 percent target still means “it will still be close to target,” Olsen said yesterday in an interview with Bloomberg News after a press conference in Oslo. “The impact would have to be very, very strong before we end up being concerned.”
Olsen said he’s willing to lower borrowing costs as offshore energy investment abates and record household debt weighs on consumers. His comments followed Norges Bank’s decision yesterday to leave its benchmark deposit rate at 1.5 percent for a 14th consecutive meeting, while pushing back the timing of monetary tightening until the end of next year, versus an earlier forecast for the “summer” of 2015. It said further weakening of the economy may warrant a rate reduction.
Norway’s krone responded by tumbling to as low as 8.3607 per euro yesterday, the weakest level since March 24, bringing its decline over 12 months to 7.8 percent. That was the biggest slide among 16 major currencies tracked by Bloomberg, and reversed four straight years of gains through 2012 that added almost 30 percent to its value. The Norwegian currency set a new three-month low today and was at 8.3691 as of 9:55 a.m. in London.
The krone also dropped 7.2 percent in the year ending yesterday against a basket of 10 developed-market currencies tracked by Bloomberg Correlation-Weighted Indexes, the most in the group. The second-biggest loser, the yen, fell 6.9 percent.
Norges Bank now predicts oil companies operating in Norway will cut investment by 10 percent next year. Last week, a key survey by Norway’s statistics agency showed that oil companies saw investment in the nation dropping by as much as 21 percent in 2015 as the industry grapples with higher costs.
Olsen’s concern over oil investment was backed this week by Prime Minister Erna Solberg, who pledged to protect the Norwegian industry from political interference and bring new fields on line. The 53-year-old premier has warned the country faces a “hard landing” unless it can boost productivity and lower costs.
“The impact of the oil industry is not just on investment and new fields,” Solberg said in a June 18 interview. “It’s also about service and maintenance. We’ll see that part of the large activity along the coast is maintenance and services -- that will increase.”
The krone’s declines helped push underlying inflation to 2.6 percent in March, exceeding the target for the first time since 2009. The rate slowed to 2.3 percent last month, and Norges Bank estimates it will stay below its 2.5 percent target through 2017.
The central bank’s assessment now is that “in the short-term, there will be a weakening of the krone as a reaction,” Olsen said in the interview. “Over the horizon we will stick to the picture that the krone will gradually, gradually strengthen.”
Olsen’s signals recall those he gave last June, according to Erik Bruce, a senior economist at Nordea Bank AB in Oslo.
“With a weaker outlook for growth, some talk of a probability for a rate cut, we will see a weaker krone and that could be enough to prevent a cut,” Bruce said in an interview. “That’s what happened last year when Norges Bank revised down their forecast.”
Olsen has repeatedly shown he’s willing to fight against currency appreciation, which can make exports less competitive. On June 20, 2013, he said he was ready to cut rates should currency strength hamper the central bank’s policy goals.
Yesterday’s slide in the krone was the biggest since that day, when it weakened 3 percent against the basket of major peers and 3.2 percent versus the euro. Norway’s currency will gain almost 5 percent by year-end to 7.96 per euro, according to the median estimate of 32 strategists surveyed by Bloomberg.
The central bank forecasts that mainland gross domestic product, which excludes oil and gas production, will expand 2 percent this year, the same as in 2013. It cut its projection for 2015 to 2.25 percent from 2.5 percent in March.
On an import-weighted basis, the krone slid 1.6 percent yesterday to 92.98, from as strong as 90.5 in May. The central bank sees the index at 91.5 in 2014, 90 in 2015 and 89.25 in 2016. A higher index value denotes weakening. The currency also dropped as much as 2 percent to a four-month low of 6.1330 per dollar yesterday.
For HSBC Holdings Plc, policy makers’ new stance presents risks for those betting against the krone.
“The central bank has successfully pushed rate-hike expectations very far into the future,” said Daragh Maher, a currency strategist at HSBC in London. “But this now creates an asymmetry whereby any even modestly strong data will force the market to reconsider their dovishness.”
(An earlier version of this story corrected HSBC’s name in the penultimate paragraph.)
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