Norges Bank Dilemma Pits House Debt Against Krone Headache

Norway’s overheated credit and property markets are vying with export-eroding krone gains for policy makers’ attentions as officials risk fueling either an asset bubble or currency appreciation.

According to Morten Baltzersen, director general of the Financial Supervisory Authority in Oslo, the country’s credit markets face “severe” imbalances as households continue to amass debt at unsustainable levels. At the same time, continued krone gains pose a “challenge” for the government, Trade Minister Trond Giske said this week.

Central bank Governor Oeystein Olsen is due to give a speech on the state of monetary policy on Feb. 16. He may use the opportunity to talk down the krone, which touched a five-month high against the euro yesterday, according to Bjoern Roger Wilhelmsen, chief interest-rate and currency strategist at Swedbank First Securities in Oslo and a former central bank economist.

The currency’s continued strength is “a headache” for policy makers, said Kjersti Haugland, a senior economist at DNB ASA, who is also a former central bank analyst, in an interview. “It will be a key factor for preventing further increases in Norges Bank’s policy rate.”

High Yield

Low interest rates have contributed to sending household debt levels to their highest since at least 1988, the central bank estimates. Policy makers at Norges Bank in December lowered the benchmark deposit rate by half a percentage point to 1.75 percent, their first cut since June 2009, and the first 50 basis point reduction since May of that year.

In September last year, Olsen warned that the bank was ready to take measures to prevent further krone appreciation, and signaled he would use the policy interest rate to do so.

Norway’s currency has strengthened as investors turn to higher-yielding markets. Even after easing policy, the central bank’s main rate is higher than the 1 percent in the euro region and a target of zero to 0.25 percent in the U.S.

The central bank is more likely to respond to threats to competitiveness stemming from krone gains than credit market imbalances, according to Erica Blomgren, chief strategist at SEB Merchant Banking in Oslo.

“I don’t expect continued credit growth to trigger near-term rate hikes,” she said. Regulatory controls and changes to tax legislation would have a bigger impact on credit and property markets, while monetary policy can do more in “guarding against wider interest rate differentials,” she said.

Krone Moves

The krone fell against the dollar for the first day in six today to trade at 5.7259 as of 10:27 a.m. in Oslo. Versus the euro, the krone was little changed at 7.5451. Even after today’s declines, the krone remains this month’s best performing major currency after the Mexican peso against both the dollar and the euro.

Norway’s government boasts the biggest budget surplus of any AAA rated nation and has no net debt thanks to a $560 billion sovereign-wealth fund. Norway’s mainland economy, which excludes income from oil and shipping, will grow 2.2 percent this year, the International Monetary Fund said Feb. 2. By comparison, the 17-member euro area will expand just 0.5 percent in 2012, the European Commission said on Nov. 10.

The country’s economic performance, which has helped keep unemployment close to 3 percent, is contributing to household debt growth as the central bank refrains from further tightening.

Bubble Talk

“Growth rates on household debt and house prices are not following a sustainable path,” Baltzersen said. “The longer these developments go on, the greater the risk is of a severe imbalance evolving.”

Robert Shiller, the co-creator of the S&P/Case-Shiller home-price index, said in January Norway is in the grip of a house price bubble, while the International Monetary Fund on Feb. 2 warned of real estate and credit market risks in Norway.

The central bank estimates private debt burdens will grow to about 204 percent of disposable incomes this year. The FSA in December turned a recommendation that credit standards be tightened into an official guideline and told banks to cap loan-to-value ratios at 85 percent from 90 percent. The decision has yet to filter through to credit markets.

Norway’s house prices rose an annual 8.4 percent in January, according to the Real Estate Brokers Association, while consumer credit growth hovers at more than 7 percent. Household debt is growing about three percentage points faster than incomes, Baltzersen said.

Meanwhile Olsen has signaled the central bank doesn’t want Norwegian interest rates to stray too far from official borrowing costs in Europe. The governor is due to speak on Feb. 16 at 6 p.m. local time.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE