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Norges Bank Olsen: Krone Still ‘Quite Weak’ But Should Strengthen
22nd June 2018
By David Barwick
(OSLO) – The Norwegian krone remains relatively weak, but there are reasons to think the currency’s present weakness will give way to a period of strengthening, Norges Bank Governor Oystein Olsen said Thursday.
Speaking to ITC following the press conference at which he explained the Executive Board’s unanimous decision of the previous day to leave Norges Bank’s key policy rate unchanged at 0.5% until likely increasing it in September, Olsen agreed that the krone was below a level consistent with fundamentals.
The krone closed Thursday at about 9.43 to the euro and 8.13 to the dollar, up from 9.48 and 8.18, respectively, the day before. Norway’s currency is also up versus the level three months ago, but less so than anticipated in Norges Bank’s March Monetary Policy Report.
“We are not surprised at the slight strengthening that we saw this morning following the … announcement of our [policy] decision,” he said. However, “even the present level … of the currency is still quite weak, much weaker than we saw back in 2013.”
Yet, he added, “it’s also possible to explain why the krone should, could strengthen slightly, given the robust growth in the economy, the higher oil price and the fact that we are somewhat earlier in raising our rate – and we are signaling that – compared to the majority of our trading partners.”
The hike in Norges Bank’s key rate anticipated for September would be the first rate move by Norwegian monetary policymakers since a 25-basis-point cut in March of 2016. The decision in favor of September was no surprise, as the Executive Board had already been predicting as of its March Monetary Policy Report that “the key policy rate will most likely be raised after summer 2018.”
Olsen acknowledged that such a move would put Norges Bank ahead of many other central banks on the path to monetary policy normalization.
“We have noticed that the potential interest rate hikes have been probably postponed in Europe, maybe also Sweden,” he said. The U.S. is another case, “and the background for that is quite obvious,” he said. However, “every country is special … and also we have some special features of our economy.”
“Our growth rate is not as high as in the U.S.,” he elaborated, “but we have a growing economy, employment growth is quite strong, unemployment looks even lower going forward, and then we have the oil on top of that, with more positive developments, prospects and impacts for the Norwegian economy, also looking forward. So that forms the background for the fact that we could be earlier than some other central banks in taking the first step in increasing policy rates.”
Though monetary authorities “seek to be consistent,” all events and information between now and an actual policy move will be carefully considered, Olsen promised. “To make a signal on the interest rate is never a promise,” he reminded. “It’s always contingent on what’s going to happen going forward.”
The specter of protectionism was a “clear downside risk,” he said. Besides affecting the real economy, “it could spill over to oil price forecasts, it could trigger some unrest in financial markets and so forth. It’s a worry.”
The additional uncertainty generated by the widening trade conflict would not stay Norwegian monetary policymakers’ hand “so far,” he said. Still, “if the trend in the direction of more protectionism accelerates, I think we could already see some impacts as regards confidence, willingness to invest, say, in Europe, and if that trend continues, it’s a worry.”
The oil price forecast is a key component of Norges Bank’s assessment, given the importance of oil exports for the country, Olsen reiterated. Oil price forecasts are based on market futures, the significant rise of which he called “important background” to the positive outlook.
Although geopolitics and other supply-side events have been the main drivers of recent increases in both spot and future oil prices, in the view of Norges Bank, demand has been growing quite steadily, he observed.
Olsen dismissed the idea that increasing official borrowing costs with core inflation still low would endanger inflation expectations. The favorable economic outlook and a tighter labor market imply “wage and price inflation edging up, and inflation will reach target in a few years,” he said. “And in any case, monetary policy should be forward-looking, and that is what we are doing.”
The bank’s main indication of underlying inflation, CPI adjusted for tax changes and excluding energy products, came in at a lower-than-expected annual rate of 1.2% in May. Headline CPI measured 2.3%, above the inflation target of 2.0%, which the government reduced from 2.5% earlier in the year.
In other comments, Olsen confirmed that Norwegian monetary authorities are following developments in Italy and indicated that recent nervousness in this connection had subsided somewhat: “Politically, they seem to have reached a solution,” he said. “You never know how long this government will last. They have a tendency to change governments quite frequently. But all in all, things have been calm in the market and also our own picture, we are more relaxed now than we were, say, two or three weeks ago.”
Looking to the U.S., he called the Federal Reserve’s steps towards policy normalization an “encouraging” sign of a return to normal on the back of economic strength.
“And also, the signals that we have heard from other central banks: yes, there is some postponement, but they have clear plans of normalizing monetary policy,” he added. “We should have confidence in the ability of central banks to do their job.”