Norway's Olsen Has No Problem With Inflation Hitting 3.5%

  • Olsen says is now `comfortable' with weaker currency
  • Says wage negotiations during spring will be important

It’s all about saving economic output now for Norwegian central bank Governor Oeystein Olsen.

Analysts last week started questioning his commitment to the bank’s 2.5 percent inflation target as he unexpectedly cut interest rates to a record low and signaled further easing, while at the same time predicting price growth topping out at just below 3 percent. Olsen says he has no problem seeing an even bigger overshoot than his forecast suggests.

Oeystein Olsen

Photographer: Krister Soerboe/Bloomberg

“We should be symmetric in our response to overshooting the target by half a percentage point or even one percentage point as we were when inflation was on the other side of 2.5 percent,” he said Tuesday in an interview after a speech in Trondheim. “It all depends on the outlook at the time, I can’t be more precise than that.”

Olsen’s surprise cut also pushed down the krone even further that could fuel even faster price growth. Inflation jumped on rising import costs as the trade-weighted krone has slumped about 17 percent over the past year. The central bank estimated last week that underlying inflation will remain above target until early 2017, while earlier seeing inflation below target through 2018.

“Broadly speaking, we are comfortable with the fact that the krone has weakened,” Olsen said on Tuesday. “I’m not saying that we perfectly foresaw the market on Thursday and Friday. We did expect some weakening of the krone as a result of our decision, but the krone has been slightly weaker than I imagined. But there’s no drama.”

The krone recouped some losses on Wednesday, gaining 0.1 percent and traded at 9.525 per euro as of 3:15 p.m. in Oslo.

Key now will be wage talks early next year, Olsen said.

The governor’s outlook also includes a rebound in the oil prices to about $65 at the end of his forecast period from just below $50 now.

“We will have a significant adjustment more or less of the magnitude that we have estimated now,” he said. “Of course it matters if oil prices are at $70 versus $40, but not in the short to medium term.”

A 50 percent drop in Brent crude in a year is threatening to halt growth in an economy that relies on petroleum for almost a quarter of its output. Norges Bank has cut rates three times since the drop in oil prices quickened, and is now signaling a more than 50 percent chance of another cut in the coming year. The bank also sees a deeper drop in oil investments next year, which will exacerbate a slowdown in growth.

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