Norges Bank Governor Oeystein Olsen said conducting monetary policy in Norway is “challenging” as the country needs to avoid an appreciation of the krone even as household debt surges.
“A higher key policy rate might have curbed debt growth and demand pressures in the Norwegian economy,” Olsen said today in prepared remarks to diplomats in a speech in Oslo. “But in an environment of persistently low external interest rates, such a policy would likely have led to a sharp appreciation of the krone, resulting in too low levels of inflation and economic activity.”
The krone reached a record on a trade-weighted basis in February and has surged about 22 percent against the euro since early 2009. Its strength has kept inflation below the bank’s 2.5 percent target since 2009 and is hurting exporters.
Olsen, who held the benchmark at 1.5 percent last month, signaled on March 14 that the bank was ready to cut rates further should the ascent continue.
The krone gained 0.2 percent against the euro to trade at 7.4539 as of 3:56 p.m. in Oslo. The krone has slid 2.7 percent since the trade-weighted high in February.
Weak global growth has prompted central bankers in the euro area, the U.S. and Japan to resort to additional stimulus measures. The Swiss central bank has pledged to keep its defense of the franc cap after almost doubling its currency holdings to shield the country from the fallout caused by the euro area’s crisis. Olsen has said that he is reluctant to widen the rate gap to the rest of Europe and the U.S.
The European Central Bank kept its benchmark at a record low of 0.75 percent today and President Mario Draghi signaled that policy makers stand ready to ease policy further if the economy deteriorates.
“The crisis in Europe and weak growth in the U.S. are also contributing to keeping interest rates in Norway at a low level,” Olsen said today.
Near record low interest rates have pushed private debt levels in Norway to all-time highs as property prices have surged. Home prices jumped 7.7 percent last year, and the financial regulator and the government are tightening capital and mortgage lending rules to cool the market. Wage increases of about 4 percent, fueled by a boom in the country’s petroleum sector, have also contributed to increased consumer spending in western Europe’s largest crude exporter.
Still, the economy is now feeling the pain from Europe’s debt crisis. Growth in exports will slow to 0.5 percent this year, down from 2.9 percent in 2012, the central bank estimates. Weaker economic growth prospects are feeding through to the labor market, pushing unemployment to the highest level since 2010. The joblessness rate stood at 3.6 percent in the January quarter, Statistics Norway data showed.