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Norway’s Central Bank not ruling out another cut in interest rates

Published on February 23, 2012 by   ·   No Comments

Norway’s central bank hasn’t ruled out another cut in interest rates, the bank’s governor Oystein Olsen said Wednesday, a sign the bank may be ready to curb the sharp appreciation of the Norwegian krone on currency markets which could damage the country’s export industry.

“Lowering rates because of the sum of factors pointing in that direction is absolutely not ruled out,” the Norges Bank governor said in an interview with Dow Jones Newswires after a speech at the University of Oslo.

Analysts had lowered their expectations of a rate cut in March after Olsen’s annual speech Thursday, when he said it could take years for inflation to return to the central bank’s 2.5% target.

However, the central bank chief said Wednesday that he hadn’t ruled out a rate cut in his speech. “On the contrary, I have said that we have maneuvering room both ways when setting rates,” he said.

But the krone exchange rate is currently “not strong enough for Norges Bank to cut rates,” said Swedbank First Securities analyst Bjorn-Roger Wilhelmsen, adding that an escalating euro crisis or a stronger krone are two possible triggers for a lower rate in March. The krone is currently just 1.5% stronger than Norges Bank’s projections from its October Monetary report, as measured by the I-44 index, he said.

The current exchange rate does not change projections of inflation and GDP growth much, said Wilhelmsen, who still believes that Norges Bank will hold the policy rate steady for most of 2012.

The central bank governor said that Norges Bank has to balance risks when setting its policy rate.

“We don’t want to force inflation up by lowering rates markedly, as far as we have room for, given that this would lead to other problems,” Olsen said. The central bank’s key interest rate is currently at 1.75%.

Olsen is likely pointing to problems such as higher wage growth and further increasing house prices and household debts, which could be the result of a too low policy rate, Wilhelmsen said.

The krone hit a nine-year high against the euro Feb. 17. Olsen said the value of the krone is “one of the variables we weigh in” when setting rates, because “it has significant effects both on inflation and the real economy.”

Echoing remarks in a speech to the foreign press in Norway Tuesday, Olsen said that if the krone stays at its current level, “we have a stronger krone than we estimated earlier.”

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