Norway has started a review of the central bank’s mandate that could include changes to how the exchange rate is managed.
The assessment will be made in parallel with a committee that’s looking at changes to the Central Bank Act, according to a statement from Finance Minister Siv Jensen. The minister emphasized that the purpose of reassessing the guidelines is not to change the current monetary policy objective of inflation targeting.
“Inflation targeting has proved effective in enhancing the Norwegian economy’s ability to adjust to large structural shocks, such as China’s integration into the world economy,” she said. “Inflation targeting has also functioned well when addressing the current challenges facing the Norwegian economy, resulting from the decline in the oil price. However, there may still be a need to update the regulation in order to bring it closer to the current consensus of how monetary policy should be conducted.”
She said a “concrete example” of how regulations may be changed concerns the mandate on how the bank deals with the krone.
“According to the current regulation, monetary policy should contribute to stable exchange rate expectations,” she said. “In many situations, including the current environment, when faced with a steep decline in oil prices, exchange rate changes may in fact be desirable.”
More leeway to target the krone would in fact only formalize what the central bank has been doing over the past five years. It has been cutting rates to weaken the currency and protect the economy of western Europe’s biggest oil producer.
Since monetary policy has become the first line of defense, “a review of the regulation should be viewed as a clarification of Norges Bank’s duties, which has actually already become practice,” SEB analyst Erica Blomgren said in a note to clients.
The review was earlier reported on by Dagens Naeringsliv.
The Gjedrem Committee looking at the Central Bank Act is due to give its report on April 10 next year and its “formulations will have a bearing on the reassessment of the Monetary Policy Regulation,” but no final date has been set for the work, according to Jensen.
Norway’s central bank has cut its benchmark interest rate to a record low of 0.5 percent and signaled it’s prepared to ease policy further to ward off a recession in western Europe’s biggest crude oil producer.