Norway’s Olsen Says He Will Work Against Build Up in Imbalances

Norges Bank Governor Oeystein Olsen said policy makers will remain committed to flexible inflation targeting as they expand their role to respond to financial imbalances when setting interest rates.

Policy should take into account inflation and “provide a reasonable balance between the path for inflation and the path for overall capacity utilization,” he said in the text of speech in Oslo today. “Notwithstanding new macro-prudential tools, we see a need to add a third criterion: The interest rate should be set so that monetary policy leans against a build-up of financial imbalances.”

The bank this month left its benchmark rate at 1.5 percent and signaled faster increases in the future after its efforts to fight back the krone’s appreciation paid off. The bank signaled it will move toward higher rates as house prices and consumer debt hover at record levels.

Norges Bank is trying to balance policy to avoid fueling krone gains without overheating an economy buoyed by a booming petroleum industry and record house prices. Private debt has surged to about 200 percent of disposable income, according to the central bank.

“We remain firmly committed to our flexible inflation targeting framework,” Olsen said. “But the global financial crisis has taught us to be both modest and inquisitive. Experience with new macro-prudential policy tools is limited, and institutional frameworks are still in the making. Leaning against financial winds remains subject to debate.”

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