Norges Bank is ready to cut interest rates further to counter krone gains that interfere with the inflation target, Governor Oeystein Olsen said.
“If it gets too strong over time, leading to inflation that’s too low, we will act,” Olsen said yesterday in an interview at his office in Oslo. “I have followed the krone development, and we always do, but it’s only one part of the overall picture.”
Policy makers around the world are discussing how to respond to a re-emergence of so-called currency wars as finance ministers from the Group of 20 gather in Moscow. Norway’s central bank governor has shown before he’s willing to deploy rates to cap excessive krone gains, cutting the benchmark by 0.75 percentage point in two moves starting in December 2011.
Olsen and his colleagues are torn between protecting exporters through lower rates that stem krone gains, and a policy that addresses an overheated property market. Western Europe’s largest oil exporter, which boasts the biggest budget surplus of any AAA rated nation, has emerged as a haven from the euro area’s debt crisis.
The krone sank as much as 0.6 percent against the euro following Olsen’s comments. Versus the dollar, it dropped as much as 1.4 percent. The krone was little changed at 7.3939 per euro as 11:57 a.m. today.
“A pronounced weakening of growth prospects, or a krone that is too strong, may over time lead to inflation that’s too low,” Olsen also said in the text of his annual speech held yesterday in Oslo. “Such development would be counteracted by monetary policy measures.”
European Central Bank council member Jens Weidmann said a rising euro alone won’t trigger a cut in rates and the gains are justified by the economic outlook. The strength of the euro “is one factor among many in determining future inflation rates” and “we will certainly not justify any monetary policy decision with one single factor,” Weidmann, who heads Germany’s Bundesbank, said in a Feb. 13 interview.
Finance Minister Sigbjoern Johnsen said the government will do its part to ensure budget policies don’t put additional pressure on the central bank.
While the krone is the responsibility of the central bank, it’s important that the government budget doesn’t make Norges Bank’s job harder, Johnsen said in an interview yesterday.
Companies such as Norsk Hydro ASA, Europe’s third-largest aluminum maker, have struggled to adjust to a stronger krone, which is pushing up export prices even as demand from Europe declines. The krone reached a record on a trade-weighted basis yesterday. Demand has left the currency 41 percent overvalued versus the dollar this year, topping 12 major currencies, according to calculations from the Organization for Economic Cooperation and Development.
Olsen also said yesterday the bank has no plans to talk the currency “up or down” and no “specific” level for what too strong means.
The strength has pushed inflation well below the central bank’s 2.5 percent target, with annual underlying inflation at 1.2 percent last month.
“It’s appropriate to use a few years to bring up inflation,” Olsen said. “Prices for Norwegian goods have increased considerably more than consumer prices, reflecting the improvement in Norway’s terms of trade. Incomes, output and employment are rising at a solid pace.”
The bank left its benchmark interest rate at 1.5 percent for a fifth meeting in December and signaled it may raise rates as early as next month to cool record debt growth.
Norway’s politicians, central bankers and business leaders have joined forces in a push to weaken the currency. Kristin Skogen Lund, chief executive officer of the Confederation of Norwegian Enterprise, said krone gains were the “main” reason Norway’s exporters have a cost disadvantage.
The world’s fourth-richest nation per capita has withstood the euro area’s debt crisis thanks to its oil wealth. Record investment in its petroleum industry has fueled demand for workers, keeping unemployment at about 3 percent.
Growth in the mainland economy, which excludes oil, gas and shipping, is estimated to slow to 3 percent in 2013 from 3.75 percent last year, according to central bank forecasts. This compares with an economic contraction of 0.3 percent in the 17-nation euro region, according to the European Central Bank’s forecast.
Low interest rates and falling unemployment have boosted private borrowing, with household debt estimated to swell to more than 200 percent of disposable incomes this year, according to the central bank. House prices, which rose an annual 8.5 percent last month, have surged almost 30 percent since 2008, almost doubling in the past decade.
“Household debt and house prices are still moving up,” Olsen said. “These are the key reasons why the key policy rate hasn’t been lowered further.”
The dilemma has spurred debate on the extent to which monetary policy should target asset bubbles, or whether rates are too blunt a tool. The central bank will start advising the Finance Ministry on how much extra capital banks need to hold in their counter-cyclical buffers next month. That follows a proposal to triple minimum risk weights on banks’ mortgage assets to 35 percent and a separate recommendation to limit the use of covered bonds to finance mortgages.
“Although growth in our part of the world is weak and real interest rates are low, many banks are still operating with high return targets, which could lead to excessive short-term risk taking,” Olsen said. “Banks and their owners should accept that return on equity will be lower, but also safer in the years ahead.”