Norway's Wealth Problem: How Do You QE Without Government Debt?

  • Norges Bank may aim directly for krone if stimulus needed
  • DNB says significant strengthening krone needed for QE

Norway is just too rich for quantitative easing.

With an $850 billion wealth fund as a backstop, the nation has had a limited need to issue bonds, leaving the level of outstanding debt potentially too small for purchases. That means launching a QE program would probably be the last measure its central bank would turn to as it seeks to avoid a recession amid low oil prices.

“If the interest rate weapon is used up, maybe they would try aiming directly for the krone,” said Kari Due-Andresen, chief economist at Svenska Handelsbanken AB. “I don’t know how much traction they would get from buying bonds in Norway, it’s hard to say if it would be a credible strategy due to the small size of the market.”

Norway’s central bank last week kept rates at a record low of 0.75 percent, saying the economy is slowing more than anticipated despite a weaker krone and record government stimulus. The bank has cut rates three times in a year to cope with a 43 percent drop in Brent crude, the lifeblood to the oil-reliant economy. The krone has lost 10 percent against the euro in a year.

Some economists now say that rates could hit zero or go lower, especially with neighboring Denmark and Sweden both with negative rates and the European Central Bank preparing more stimulus. Governor Oeystein Olsen, who has stuck to the line that the board hasn’t discussed negative rates, in September signaled more than a 50 percent chance of more easing in the next year.

Norway “could and they would use QE if the situation called for such measures to be taken,” said Kjersti Haugland, an analyst at DNB ASA. “But it would take a significant strengthening of the krone to levels uncomfortable for Norwegian businesses for this to happen.”

Norway has 336 billion kroner ($38.6 billion) in outstanding nominal government bonds, compared with 592 billion kronor ($68.2 billion) in neighboring Sweden. Sweden’s Riksbank last month expanded its bond-purchase plan for a fourth time since February as it tries to keep pace with stimulus measures in the euro zone. Denmark has 376 billion kroner ($54 billion) in total nominal bonds issued.

“My guess is that we will have negative rates in Norway before there will be any talk of QE,” Handelsbanken’s Due-Andresen said.

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