How Does Norway Achieve Inflation When Others Can't?

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Norway central bank Governor Oeystein Olsen has what the rest of Europe is looking for: inflation.

His success in delivering price growth comes after he scrapped the rule book in 2012 to target the krone. The currency quickly became a concern after Olsen took over as it emerged as a haven during the European debt crisis, hitting a nine-year high against the euro.

After shocking with a cut in March 2012, Olsen kept interest rates unchanged for 1,000 days while signaling he may ease again to keep currency traders at bay instead of being bullied by what some called a housing bubble. As plunging oil prices now add to deflation woes in Europe, Olsen can boast 2.4 percent inflation.

The bank’s “dirty float is quite obvious,” said Anna Raman, a senior economist at Nykredit Markets. Lowering rates as the economy was strong, unemployment low and housing “red-hot” revealed Olsen’s hand, she said, adding the bank has “over the years targeted inflation, wages or currency to its liking.”

Olsen, who declined to be interviewed for this article, said as much in 2013. The krone has been an important driver in determining rate moves, Olsen said, calling it the “main argument” for easing in March 2012 and “one of several factors” for rate cut signals in June 2013.

The krone rose 0.4 percent to 8.6444 per euro as of 3:46 p.m. in Oslo.

Real Economy

By never officially targeting the currency, or keeping a “dirty float” as Raman calls it, he has avoided troubles that have befallen other central banks, such as Switzerland’s, whose abandonment of its franc cap last month roiled markets.

While Olsen and his colleagues insist they have no target for the krone, the currency has weakened 34 percent against the dollar and 12 percent against the euro since he took charge. He has even taken a simple step and moved his economists in with the currency traders, according to Jan F. Qvigstad, the former deputy bank governor.

Australia’s central bank today unexpectedly cut rates to a record low as it also tries to limit currency gains and spur economic growth, joining a dozen global counterparts in easing policy this year as commodity prices tumble.

Olsen, who didn’t have any background in monetary policy, has drawn on his knowledge of the real economy, honed while he headed the economics department at Norway’s Finance Ministry and as director of the nation’s statistics bureau.

Stay Calm

“Oeystein is very much focused on the real economy, labor markets in particular,” said Martin Skancke, who runs his own consulting business and worked as Olsen’s deputy at the Finance Ministry early last decade.

The bank governor also has a knack for remaining calm in tense situations, Skancke said.

The governor has had a lot of help from the booming petroleum industry, keeping Norway at full employment, according to Knut Anton Mork, chief economist at Svenska Handelsbanken AB in Oslo. It was also the financial regulators that stepped in to help cool the housing market, counteracting the two cuts Olsen delivered, according to Mork.

“He’s been lucky,” said Mork, who in the late 1980s co-authored a paper with Olsen on the impact of oil prices.

Olsen now faces a different challenge, which will call on his expertise, as he will need to steer the economy of western Europe’s biggest crude producer through the worst slump in crude prices in more than half a decade.

He has already signaled his intentions: cutting rates in December and saying there’s a 50-50 chance for another reduction as soon as March. This time he’s also abandoning his inflation target, signaling lower rates even as inflation is seen exceeding the 2.5 percent target.

“He’s never been an expert in monetary policy, he’s a broader macro economist,” said Steinar Holden, a professor in the economics department at the University of Oslo. Holden was a candidate for the deputy governor job in 2008. “He’s less focused on the rate of inflation -- for a central bank it’s easy to be too focused on that.”