Norway Rate Policy Can’t Ignore Credit Imbalances, Vikoeren Says

Norway’s interest rate policy needs to guard against credit-driven imbalances to help attain the inflation target over time, the head of the central bank’s monetary policy department said.

“We should reach our inflation target, we should try to stabilize variations in production growth and in addition we want to conduct a robust monetary policy to avoid the building up of imbalances that make it difficult to reach the inflation target over time,” Norges Bank Executive Director Birger Vikoeren said in an interview in Oslo today. “Our monetary policy is a balance of these three considerations.”

The bank has tried to balance efforts to prevent the housing market from overheating without fueling krone appreciation that’s already driven inflation down well below its 2.5 percent target. As it battles on two fronts, signs of imbalance are growing.

Norway’s financial regulator warned yesterday that the prevailing optimism in western Europe’s largest oil producer can easily evaporate and trigger retrenchment among households. At the same time, Norges Bank Governor Oeystein Olsen signaled last month he’s ready to cut rates to stem krone appreciation.

Vikoeren said today he shares the watchdog’s concern over household debt and house prices, even as the krone is a “challenge” to bank’s inflation target.

House prices have doubled since 2002 and rose an annual 7 percent last month, according to the Norwegian Association of Real Estate Agents. Household debt will swell to more than 200 percent of disposable incomes this year, the bank estimates.

Only Inflation

Low interest rates have fueled house price gains after Norway’s central bank held its benchmark interest rate at 1.5 percent for more than a year. Policy makers last month signaled a possible cut to match a 2009 record low as they try to fight krone gains.

Vikoeren reiterated today that if the central bank only looked at inflation, it would have cut rates.

The inflation rate, adjusted for taxes and energy prices, fell to an annual 0.9 percent last month from 1.1 percent in February, according to Statistics Norway.

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