Norges Bank Governor Oeystein Olsen said the bank will start a “thorough assessment” on how it can use flexible inflation targeting, including how to respond to changes in the cost of the nation’s exports and imports.
“Our small, open economy presents particular challenges,” he said in a speech today at the BI Norwegian Business School in Oslo. “How does this restrict the room for maneuver in monetary policy? And how should monetary policy respond to changes in the terms of trade?”
The bank last month kept its deposit rate at 1.5 percent for a ninth meeting and signaled faster tightening after efforts to fight back the krone’s appreciation were successful. That has freed up policy makers to focus on an overheated housing market.
The bank has kept rates unchanged for more than a year while indicating as recently as June that policy makers were prepared to ease to prevent krone strength from undermining their inflation targeting. Those efforts have paid off as underlying inflation surged to 2.5 percent in August, hitting the target for the first time in four years.
Olsen said today that he wouldn’t favor setting a threshold for changes in interest rates, as has been done in other countries, since it’s “more suited to a situation where the key rate is close to zero and additional measures are needed to keep long interest rates low.”
“The Norwegian economy is in a more favorable situation than the large advanced economies I have mentioned,” he said. “Capacity utilization is estimated to be close to a normal level. We still have room for maneuver in interest rate setting.”
The krone has lost about 10 percent against the euro this year, paring some of its gains since 2009. The currency slid on rate warnings from the central bank and after a recovery in the euro area diminished the allure of assets from AAA rated Norway.
Faster inflation is accompanying a slowdown in growth in the $500 billion economy. Mainland gross domestic product, which excludes oil and gas production, will expand 1.75 percent this year, after growing 3.4 percent in 2012, the bank forecast today. Output by that measure will grow 2.25 percent in 2014, the bank forecast.
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