Norges Bank Deputy Governor Jan F. Qvigstad signaled that policy makers in the second-largest Nordic economy won’t accept persistent strength in the krone and warned speculators against testing the bank’s resolve.
“If the krone is persistently strong that is, in isolation, an argument for a lower interest rate,” Qvigstad said in an interview in Oslo yesterday. There’s “large” volatility in the krone, which can make it difficult to “make a profit” from the strength of the currency, he said.
The bank kept the main interest rate unchanged yesterday at 1.5 percent for a third meeting, following two cuts since December to curb krone gains that have hampered exports and kept inflation below the bank’s 2.5 percent target. The krone, which has emerged as a haven from Europe’s debt crisis, soared to a nine-year high against the euro this month as Norway’s oil wealth and fiscal strength spurred a capital influx.
The central bank signaled it will keep its benchmark rate unchanged until sometime between December and the “summer,” when tightening will commence to cool domestic demand. Europe’s second-largest oil exporter is benefiting from record petroleum investments which, coupled with low rates, has fueled a boom that’s kept registered unemployment below 3 percent, sent wages higher and pushed house prices to records.
“If the krone appreciation continues, in October the bank will announce a further delay to timing of the next hike,” Bjoern-Roger Wilhelmsen, chief currency strategist at Swedbank First Securities ASA, said in an e-mailed reply to questions.
The bank said yesterday that the “import-weighted krone exchange rate is somewhat stronger” than predicted in June. Policy makers had predicted the import weighted-exchange rate would probably strengthen 2 percent by 2014. The weighted krone index has risen about 1 percent since June 20 to 86.32 today, compared with June forecasts for 87.75 this year and 85.75 in 2014. A lower index value indicates a strengthening.
The krone jumped yesterday after policy makers indicated they were sticking to plans to raise rates. It has risen 6.1 percent against the euro since the start of the year and 2.8 percent against the dollar.
It weakened 0.1 percent to 7.2983 per euro and gained 0.1 percent against the dollar to 5.8152 by 8:26 a.m. in Oslo.
“The market is extremely focused on the krone but I think that’s a bit exaggerated,” Erica Blomgren, chief strategist for Norway at SEB AB in Oslo, said in reply to e-mailed questions. “Norges Bank has since June ‘accepted’ the krone will be strong.”
Norges Bank will publish new forecasts on Oct. 31.
Policy makers have emphasized their reluctance to widen the rate gap to Europe, where the European Central Bank cut its main refinancing rate last month by a quarter point to a record-low 0.75 percent. Norway, which isn’t a European Union member, is backstopped by a $625 billion sovereign-wealth fund and boasts the biggest budget surplus of any AAA rated nation.
“We don’t have any target for the krone,” Qvigstad said in the interview yesterday. “The interest rate on foreign currencies matters for the krone.”
Norwegian exporters are struggling as currency gains raise the cost of their goods. Employers such as the world’s second-biggest newsprint maker Norske Skogindustrier ASA and solar company Renewable Energy Corp. ASA have cut jobs in response.
Still, the strong krone has helped keep inflation in check even as growth expands. Annual underlying inflation, which adjusts for taxes, fees and energy prices, was 1.3 percent in July. Inflation has undershot the bank’s 2.5 percent target since mid-2009.
Forward rate agreement showed investors pared some bets on lower rates. Three-month forward rate agreements maturing in December rose two basis points yesterday and traded at 2.07 percent by 8:37 a.m. in Oslo. Contracts expiring in March traded at 1.94 percent. The FRAs settle to the three-month Norwegian interbank offered rate, which was 2.05 percent yesterday. The difference to the deposit rate is now 55 basis points, compared with an average of 75 basis points over the past five years.
“For the time being, businesses are coping, because many have hedged themselves against shorter term krone variations,” Trade and Industry Minister Trond Giske said in an interview yesterday in Stavanger. “But on the long term, a very strong krone against the euro will be a problem.”