Truce Called on Krone as Norway’s Economy Survives Crude Crisis

  • Norges Bank governor says not targeting a level on the krone
  • Central bank removes chance for benchmark zero rate in 2016

Norway’s central bank is signaling the krone has more room to rise as the economy of western Europe’s biggest oil producer looks set to avoid a recession.

Policy makers who spent the past two years cutting rates to damp krone demand are now signaling they are nearing the end of an unprecedented easing cycle. While they foresee one more reduction this year -- after holding the key rate at 0.5 percent -- they on Thursday scrapped the possibility of the benchmark hitting zero this year.

The krone jumped as much as 0.9 percent against the euro after the new outlook was unveiled, driving the currency to a 3.2 percent appreciation this year. The krone has gained as the price of crude has rallied 81 percent from a low in January. Governor Oeystein Olsen said the krone’s rise is no cause for concern at the moment.

“We’re not focusing on the currency as such,” he said in an interview after a press conference in Oslo. “The bank is pursuing an inflation target. The currency channel remains important, both for the prospect of inflation and for output. We’re observing what’s happening in the currency market, but we’re not targeting any level."

The bank’s rate outlook signals that a global tit-for-tat to devalue currencies may be coming to an end -- at least in the Nordic region. Olsen joins his colleagues in Sweden in lowering his vigilance against further currency strength. The Swedish central bank have also signaled that it can now accept some currency appreciation as it scaled back the pace of new stimulus.

Norway, while hurt by the collapse in oil prices, has managed to avoid the negative rates and unconventional polices that dominate elsewhere. The government is spending a record amount of its petroleum wealth which, combined with successive rate cuts over past years, has supported the economy.

The biggest reason for pushing its rate outlook higher was private demand and public spending, according to the bank. Acting in the other direction was a stronger krone, the outlook for foreign interest rates and slower wage growth.

While the bank left its forecast for so-called mainland growth unchanged at 0.8 percent, Olsen and his colleagues said that the labor market had been stronger than anticipated. They now foresee unemployment dipping again, reaching 4.4 percent next year from about 4.6 percent now. That level, of course, would be the envy of the rest of Europe.

Moderate Rise

After plunging almost 30 percent on a trade-weighted basis over the past three years, the krone is now showing signs of life again as crude recovers. The currency has strengthened by about 3 percent on a trade-weighted basis since January.

For Olsen, the strengthening of the krone “has been relatively moderate,” especially when compared with the weakening of the past years.

Asked if the mainland economy can withstand a stronger currency, Olsen said: “I think if you take the present level, the answer is ‘yes,’ many traditional Norwegian industries still benefit from a weak krone, compared to a couple of years ago."

Analysts at SEB say the more relaxed attitude toward the currency is because the krone has strengthened for the “right reasons” and that positive effects from higher oil prices have the upper hand for now. That said, the central bank will remain vigilant to quash any speculative strength.

Levels below 9.00 per euro “will only be acceptable once the bank is no longer exclusively focusing on downside risks to growth,” said Erica Blomgren, chief strategist at SEB, in a note.

The government is also willing to accept the recent currency gains.

In an interview on Wednesday, Prime Minister Erna Solberg warned exporters in her country against relying too heavily on the weakening currency that have supported their sales abroad in recent years.

“We can’t rely on a weak currency going forward,” the 55-year-old premier told Bloomberg in Oslo on Wednesday. "In the long run, it’s Norway’s productivity level and innovations that will determine our ability to grow.”

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