Olsen Seen Dashing Rate Cut Bets in Acceptance of Strong Krone
Norway’s central bank Governor Oeystein Olsen is becoming more accepting of krone gains as an urgency to contain surging house prices is gaining prominence, analysts including Erica Blomgren at SEB AB said.
The governor today in a speech said that the bank’s policy was becoming more flexible and that it wouldn’t intervene directly in markets unless the currency’s value becomes unmoored from economic fundamentals.
“Norges Bank is more tolerant now than previously,” Blomgren, chief strategist at SEB in Oslo, said following the speech. “He seems to accept a stronger krone and that a renewed rate cut aimed at weakening the krone is not on the cards.”
That may wrong-foot traders who according to forward rates are betting the bank will lower interest rates again this year. Olsen had cut rates by 0.75 percentage point since December to cap gains in the currency and protect the economy against the fallout from Europe’s debt crisis.
Olsen said today that currency interventions would come only if the krone rate “moves significantly out of line with that deemed reasonable in relation to the underlying fundamentals” of the economy and that the “interest rate weapon must already have been exhausted.”
Olsen wasn’t “surprised” his comments were interpreted as a hawkish signal, he said in an interview. “It was not a specific intention to give a specific signal to the currency market,” said. “For a long time we have noticed and we have described the krone as being strong.”
Investors have flocked to the krone amid speculation of a breakup of the euro area. Norway, which like Switzerland isn’t a European Union member, is backed by a $640 billion sovereign- wealth fund and has no net debt. The currency, which hit a nine- year high against the euro last month, strengthened as much as 0.3 percent before trading 0.1 percent higher at 7.4362 by 3:19 p.m. in Oslo.
“I will not project or speculate development of the krone. It fluctuates,” Olsen said, adding that on average the currency has been “slightly stronger” in the third quarter than forecast in June. “It is very hard to detect a unique correlation between unrest in the market and the krone development because it depends on what kind of unrest, the nature of unrest and how strong it is.”
Persistent krone gains have prompted some fixed-income traders to bet on a rate cut this year, even after policy makers said they would reverse easing from “the turn of the year.” Three-month forward-rate agreements for December have fallen 20 basis points since Aug. 31 to 1.86 percent. It settles to the Norwegian interbank offered rate, which was quoted at 1.92 percent today. Nibor has averaged about 74 basis points more than the central bank’s key rate this year.
While the krone rose to a nine-year high against the euro last month, the import-weighted exchange rate remains below the 85.5 level that triggered a rate cut in March. The index stood at 86.7 by 3.08 p.m. in Oslo. A lower figure denotes an appreciation against a basket of currencies.
“Assuming everything else being equal, I guess that the krone would have to appreciate at least 2 percent from here before Norges Bank would consider a cut,” Bjoern Roger Wilhelmsen, chief currency strategist at Swedbank First Securities, said in an e-mailed reply to questions.
Krone gains have helped push down underlying inflation, which adjusts for taxes and energy, to an annual 1.2 percent. Inflation has hovered below the bank’s 2.5 percent target since July 2009, as the krone’s advance damps import prices.
“If monetary policy only took into account the low level of inflation, the key policy rate would be rapidly reduced and kept close to zero for a good while,” Olsen said his speech today. “Inflation might then pick up faster, partly as a result of a weaker krone. In the light of the trade-off against other considerations, however, the bank does not want to accelerate the pace of inflation.”
Policy makers will next meet on Oct. 31 to decide on interest rates and present a new rate path.
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