Norway’s central bank can’t be held accountable for industrial competitiveness and the exchange rate when setting monetary policy, Governor Oeystein Olsen said, as the bank prepares to resume tightening later this year.
“We don’t want to take the responsibility for the currency level nor the overall competitiveness of the manufacturing industry,” Olsen said yesterday in an interview in Oslo.
Olsen, who took office this year, also yesterday reinforced the bank’s 10-year commitment to inflation targeting in his first traditional annual address. He had previously signaled the bank would keep a closer eye on asset-price bubbles when setting policy in the world’s second-richest nation per capita.
The bank, which in 2009 became the first in Europe to lift rates after the financial crisis, is trying to balance policy to keep an economic rebound apace and has said it will raise borrowing costs again in mid-2011. Policy makers have held their main rate unchanged at 2 percent since May on concerns that European austerity measures may hurt exports.
The krone strengthened to 7.758 per euro as of 8:08 a.m. in Oslo, from 7.763 yesterday. It weakened less than 0.1 percent to 5.707 against the dollar.
Prospects of higher rates and an economic expansion of 2.2 percent last year helped push the krone to the highest in eight months against the euro last month. It has gained 5 percent against the euro since the end of October, making it the fifth best performer among major currencies tracked by Bloomberg. Krone gains have hurt exports, which fell 1.3 percent last year, according to Statistics Norway.
No Specific View
“We seek to take these kinds of effects into consideration when it affects the real economy,” Olsen said. Still, “at Norges Bank we have no specific view on any equilibrium target or views on a specific level for the exchange rate.”
Olsen, who succeeded Svein Gjedrem as central bank governor last month, held his first annual address in Oslo today.
Krone gains and a sluggish economy have kept inflation below the central bank’s 2.5 percent target since July 2009. Annual underlying inflation, which excludes energy costs and taxes, eased to 0.7 percent in January from 1 percent the previous month.
The low rate combined with Europe’s lowest unemployment boosted consumer confidence in the fourth quarter to the highest in more than three years. Property prices rose an annual 8 percent last year and are expected to gain about 6 percent a year over the next four years, Statistics Norway forecast today. Household credit growth has risen to 6.5 percent in December from 6.1 percent in July.
“We don’t neglect those effects. We seek to balance the damage it has on the real economy towards the prospects of inflation. But we don’t lose sight of the final target,” Olsen said. “We only have one instrument that is the interest rate and we should not overload one instrument by setting up several targets.”
Record-low rates in the U.S. and the euro region have capped the scope for tightening in Norway as the bank tries to avoid increasing the rate differential, Olsen said, adding that rate expectations in Europe had increased recently.
“Yes that provides us with more scope to increase interest rates in Norway,” Olsen said.
The bank expects its benchmark rate to average 2.25 percent this year and 3.25 percent next year. Statistics Norway expected the rate to be raised by 25 basis points each quarter from June 2011 until the end of 2014.
“The money market rate is expected to change roughly in line with the base rate, and to exceed 6 percent by the end of 2014. The average interest on loans in the banks is expected to reach 7.5 percent,” the agency said today.
Olsen and his policy making board will meet on March 16 to discuss interest rates. The board will also publish its first monetary policy report for 2011, which will contain an updated interest rate path.
“We will take new events into consideration,” Olsen said.