Currency War Shuffles Office Chairs as Norway Tames Krone

Norwegian central bank policy makers took a very simple step when the surging krone risked derailing their inflation-targeting regime. They moved their economists in with the currency traders.

Putting the macro economists next to the markets department improved the understanding of the effects of currency moves on the economy, according to Jan F. Qvigstad, who steps down today as deputy governor of the Oslo-based bank after a six-year term.

“We understand more now than we did five or 10 years-ago of what’s happening in the currency markets,” Qvigstad, 64, said in a March 27 interview at his Oslo office. The economist team “managed to combine their knowledge with the market side and took them seriously, so the policy makers inside the bank could communicate much better with the market side.”

Policy makers were faced with a new reality as Europe’s debt crisis starting in 2009 turned the Norwegian krone into a haven for investors fleeing a potential breakup of the euro. Surging currencies also prompted a growing band of countries from Switzerland to Japan and New Zealand to respond to strengthening exchange rates, in what was dubbed a currency war.

‘Dirty Float’

Following Switzerland’s move in 2011 to cap an appreciation in the franc, Governor Oeystein Olsen started warning that he may cut rates to weaken the krone. After lowering rates twice, his fight culminated in June last year when he stunned traders by signaling he was preparing to ease again, triggering the biggest decline against the euro in more than four years.

While Olsen and his colleagues insist they have no target for the krone, strategists at Danish lender Nykredit Markets said last year said the bank is operating a “dirty float” on the currency and that the krone is the “true focus.”

The currency has slid 10 percent against the euro over the past year, helping ease the pain for exporters such as Norsk Hydro ASA. Economic growth slowed to 2 percent in 2013 from 3.5 percent in 2012.

Olsen said in an interview last week after keeping rates unchanged at 1.5 percent that the weakening krone through 2013 was “important” for the economy. The bank in December pushed back a rate increase by at least a year as a cooling housing market and a slowing oil boom threatened an expansion in western Europe’s biggest oil producer.

Different Views

Backed by an $850 billion sovereign wealth fund, the krone surged as much as 20 percent by 2012 from 2009, pushing inflation to an annual 0.2 percent and calling into question the bank’s inflation targeting. Its decline over the past year helped boost inflation to 2.4 percent last month, close to the bank’s 2.5 percent target.

“We have to accept that there are a lot of different themes in the currency markets,” Qvigstad said. The bank should be “humble” in how it views the short-term movements and needs to “communicate better with the market,” he said.

The krone gained 0.05 percent at 8.2558 as of 4:46 p.m. in Oslo.

Qvigstad, who has worked at Norges Bank on and off since 1984, will be replaced by Jon Nicolaisen, an executive director at the bank.

The deputy governor said he’s now more upbeat about the unwinding of the unprecedented stimulus programs pursued by the U.S. Federal Reserve, European Central Bank and Bank of England. In a 2012 speech in Oslo, Qvigstad likened ECB President Mario Draghi, former Bank of England Governor Mervyn King and former Fed Chairman Ben Bernanke to John Law, a banker who fled 18th century France after creating an asset bubble.

The Extreme

“Monetary policy had been put to an extreme,” Qvigstad said. “I’m less concerned now.”

Qvigstad, who will now oversee the production of three books for Norges Bank’s 200th anniversary in 2016, said his biggest accomplishment as deputy governor was to increase transparency. While the bank doesn’t make board minutes public for 12 years, it did start publishing more of the discussion within the board, he said.

The seven-member board, which includes the bank governor, the deputy governor and five other part-time members, makes decisions by consensus. It also oversees the wealth fund.

While Qvigstad doesn’t see Norges Bank copying Sweden’s Riksbank model with individual board members’ statements made public, he does expect it to make progress in increasing its clarity in its message.

“Personally I have a preference for the way the Bank of England writes their minutes,” he said. “It’s easy to see what the real arguments are.” The way Norges Bank writes and reveals minutes is “not too different from the way BOE writes their minutes.”

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