Norges Bank’s Olsen Urges Spending Cuts as Oil Wealth Grows
February 16, 2012, 8:50 PM ESTBy Josiane Kremer
(Updates with comment from Finance Minister in fifth paragraph.)
Feb. 16 (Bloomberg) -- Norway’s central bank Governor Oeystein Olsen told the government to spend less of the country’s oil money and avoid an over-reliance on its commodities wealth or risk killing manufacturing jobs.
The government should tighten its fiscal policy guidelines and limit the use of petroleum revenue to 3 percent of Norway’s sovereign wealth fund from the current 4 percent, Olsen said today in the text of his annual speech on the economy and monetary policy.
“Even though petroleum revenues are phased in gradually, a phasing out of manufacturing and other private industries may not be as smooth,” he said. “Entire industries could be lost. If spending proves to be excessive, such structural changes may be difficult, or impossible, to reverse.”
The world’s seventh-largest oil exporter, which boasts the biggest budget surplus of any AAA rated nation, has largely been shielded from the global financial crisis, in part after spending a record amount of its oil money. The statistics office estimates Norway’s economy, excluding income from oil and shipping, will grow 2.7 percent this year, versus a European Commission estimate for only 0.5 percent in the euro area.
Finance Minister Sigbjoern Johnsen said the government has “no plans” to heed Olsen’s advice, warning policy makers need to be “careful” when considering such changes, in comments to reporters in Oslo.
Growing Fund
The government, led by Prime Minister Jens Stoltenberg, last year brought spending to within 4 percent of the $596 billion sovereign-wealth fund. Still, the fund has grown more than 10-fold since 2001, when the rule was put in place, and will almost double by 2020, the government estimates. That means 4 percent represents more money each year, adding to stimulus.
Olsen said lowering the spending limit to 3 percent also makes sense because the expected real return for the fund is lower than the 4 percent estimated when the rule was created.
“At the moment, it would seem that economic growth ahead will be more modest than in the favorable pre-crisis years,” he said. “We must therefore be prepared for an extended period of lower returns, even though growth and financial market returns do not always go hand in hand.”
Olsen in December lowered the deposit rate by half a percentage point to 1.75 percent, the first cut since June 2009. Policy makers are torn between protecting exporters through lower rates that cap krone gains and a monetary policy path that addresses household debt growth.
Room to Maneuver
While the bank still has room to maneuver in both directions on rates, the “question nonetheless remains whether it’s desirable to use monetary policy to accelerate the pace of inflation when the countries around us are in a recession,” Olsen said. “Even if the krone depreciates somewhat, relatively high cost growth in Norway that could quicken the pace of inflation might lead to a further deterioration in competitiveness.”
Norway’s currency has strengthened as investors turn to higher-yielding markets. The krone reached a five-month high against the euro this week, prompting speculation Olsen may talk the currency down. In September, Olsen warned that the bank was ready to take measures to prevent further krone appreciation, and signaled he would use the interest rate to do so.
Credit Growth
At the same time low borrowing costs and unemployment have fueled household borrowing. Private debt levels have risen to their highest since at least 1988, the central bank estimates. House prices surged an annual 8.4 percent last month, according to the Real Estate Brokers Association. Consumer credit growth hovers at more than 7 percent.
“Low interest rates over a prolonged period tend to amplify an upward spiral in house prices and lending,” Olsen said. “Imbalances that build up in credit markets can have severe ripple effects further ahead, with substantial impact on output and employment.”
Underlying inflation accelerated for the first time in five months in January to 1.3 percent from 1 percent a month earlier. The central bank targets price growth of close to 2.5 percent.
“Under the current outlook, it will likely take several years before the inflation is back on target,” Olsen said.
Policy makers next meet March 14 to decide rates.
--With assistance from Stephen Treloar in Oslo, Editors: Jonas Bergman, Tasneem Brogger
To contact the reporter on this story: Josiane Kremer in Oslo at jkremer4@bloomberg.net
To contact the editor responsible for this story: Tasneem Brogger at tbrogger@bloomberg.net
