Bloomberg News

Norway Krone Surge May Trigger Central Bank Response This Week

February 21, 2012

Feb. 14 (Bloomberg) -- A surge in Norway’s krone may prompt the central bank to talk down the currency’s strength as early as this week as policy makers renew their efforts to support exports.

The krone rose yesterday to its highest against the euro since Sept. 8, to 7.5460, and has gained about 4 percent since a November low. Versus the dollar, the krone yesterday rose to its strongest since Nov. 13, reaching 5.7106.

Policy makers are monitoring the exchange rate, which continues to be a “challenge” for the government, Trade Minister Trond Giske said in an interview yesterday. The central bank in September signaled it was ready to take steps to curb the krone’s appreciation after the currency soared to an eight- year high. Those comments helped weaken the exchange rate, triggering a 4.8 percent decline from a Sept. 8 peak through a trough two weeks later. In December, the bank slashed its main rate by half a point, its first such cut since May 2009.

If the krone’s gains continue this week, central bank Governor Oeystein Olsen “may talk it down on Thursday, saying that a too-strong krone will have implications for monetary policy,” said Bjoern Roger Wilhelmsen, chief interest-rate and currency strategist at First Securities Swedbank in Oslo, in an interview.

Olsen is due to give his annual address on the state of monetary policy on Feb. 16. In a Sept. 8 speech last year, Olsen warned that the central bank is ready to take “monetary policy measures” to prevent the krone from appreciating too much and that the “key policy rate is the relevant instrument” with which to do so.

‘A Headache’

The currency’s continued strength is “a headache” for policy makers, said Kjersti Haugland, a senior economist at DNB ASA and a former central bank analyst, in an interview. “It will be a key factor for preventing further increases in Norges Bank’s policy rate.”

Norway’s currency has strengthened as investors turn to higher-yielding markets. Even after easing policy, the central bank’s main rate is at 1.75 percent, compared with 1 percent in the euro region and a target of zero to 0.25 percent in the U.S.

Norway’s government boasts the biggest budget surplus of any AAA rated nation and has no net debt thanks to a $560 billion sovereign-wealth fund. Norway’s mainland economy, which excludes income from oil and shipping, will grow 2.2 percent this year, the International Monetary Fund said Feb. 2. By comparison, the 17-member euro area will expand just 0.5 percent in 2012, the European Commission said on Nov. 10.

‘Severe’ Imbalances

“With a strong economy and other countries doing not so well that is always a challenge,” Giske said, referring to the krone’s strength. The government needs to rein in spending and curb wage growth in order to prevent an appreciation of the krone that erodes competitiveness, he said.

The central bank is torn between protecting its exporters through lower rates that cap the krone’s strength and a monetary policy path that addresses Norway’s household debt growth.

Norway faces “severe” imbalances in its credit and property markets as households continue to amass debt at unsustainable levels, Morten Baltzersen, Director General of the Financial Supervisory Authority in Oslo, said in an interview.

Robert Shiller, the co-creator of the S&P/Case-Shiller home-price index, said in January Norway is in the grip of a house price bubble, while the IMF on Feb. 2 warned of real estate and credit market risks in Norway. Household debt will reach 204 percent of disposable incomes this year while house prices rose an annual 8.4 percent in January, official data show.

“If other factors in the domestic economy allow it then Norges Bank would be prepared to act in order to try and make the situation less serious for the exporters,” Haugland said.

--Editors: Tasneem Brogger, Jonas Bergman.

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


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