Feb. 25 (Bloomberg) -- Norway’s Prime Minister Erna Solberg pledged to deliver policies that prevent the krone from strengthening as Scandinavia’s richest nation fights to stay competitive amid stagnant oil prices and rising costs.
While the government won’t actively weaken the krone it will have “competitiveness at the forefront of our plan,” she said in an interview after meeting with business leaders in Oslo yesterday. “We will of course have to make sure that our fiscal policies don’t strengthen the krone.”
Backed by an $830 billion sovereign wealth fund, Norway is struggling to absorb an oil industry that has driven up production costs across the economy. That’s threatened competitiveness for some of its biggest exporters, including aluminum producer Norsk Hydro ASA, even after the krone eased 11 percent against the euro over the past year.
The central bank has fought currency appreciation since 2011 as investors fleeing Europe’s debt crisis turned to AAA-rated Norway. The bank cut rates in 2011 and 2012, driving down the exchange rate in an effort to bring inflation to its 2.5 percent target. In June last year, it again signaled readiness to cut rates. Then in December, the bank left its benchmark rate at 1.5 percent and pushed back tightening plans by a year to mid-2015.
The krone gained 0.2 percent to 8.2724 per euro as of 9:44 a.m. It climbed 0.7 percent yesterday after insiders in pharmaceutical company Algeta ASA accepted a buyout offer from German drug maker Bayer AG.
The krone’s depreciation since the end of 2012 helped cushion a slowdown in the economy last year. Norway has been weighed down by record consumer debt and declining house prices after a five-year rally reversed. In 2013, the mainland economy, which excludes oil, gas and shipping revenue, expanded 2 percent, slowing from 3.4 percent in 2012.
“We know that how the exchange rate develops depends on a lot of different figures, it might also change because of things happening in other countries,” she said. “The fact that the economy becomes better in other countries might also increase their currencies.”
A government study released last week showed that industrial wages in Norway last year were 55 percent higher than the average of its trading partners. Wages slid 2 percentage points from the year before, helped by a weaker krone. Norwegian manufacturing wages have risen 4.2 percent, on average since 2004, compared with 2.8 percent for its trading partners.
Central bank Governor Oeystein Olsen said earlier this month that exporters shouldn’t count on a weaker krone to compensate for lost competitiveness. Norway must start preparing for an economy without oil, Olsen said, adding that investment in the petroleum industry is leveling off and output growth has “slackened” in the mainland economy.
DNB ASA Chief Executive Officer Rune Bjerke said yesterday he sees “a slower speed in the Norwegian economy. We do have growth of about 2 percent and that’s not bad if you look at the European countries.”
“It’s a risk to see lower oil prices over time,” the CEO of Norway’s largest bank said. Oil averaged more than $100 a barrel for the past three years, tripling from its 2008 low as the world economy recovered from the financial crisis.
Bjerke sees oil prices at about $104 a barrel at the end of this year with a gradual decline to $90 by 2020.
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