Norwegian rates will combat currency speculation, says central bank chief

Norges Bank governor Øystein Olsen has warned he will use interest rates to dampen rampant speculation on the Norwegian krone, which has surged to record levels not seen since the 1980s after the Swiss National Bank forced its franc down against the euro.

“Earlier this week, the Swiss National Bank decided to announce a minimum exchange rate for the Swiss franc against the euro owing to the substantial appreciation of the Swiss franc,” Olsen said.

“Interest rates and inflation in Switzerland are close to zero and growth is low. According to the Swiss National Bank, a further appreciation could have resulted in a recession with deflationary developments. Measures were therefore introduced to prevent such developments. The Norwegian krone appreciated sharply after the announcement. A krone that is too strong can over time result in inflation that is too low and growth that is too weak. In that case, monetary policy measures will be taken. In Norway, the key policy rate is the relevant instrument.”

“The Norwegian krone market is small by international standards. This means that the krone exchange rate can fluctuate considerably in times of international turbulence. This will also be the case the day foreign exchange market participants decide to shift out of their krone positions. The exit may prove narrow if too many investors decide to withdraw at the same time.”

Olsen’s speech was part of a pre-planned meeting at the Department of Economics at the University of Oslo. However, he was forced by events of the past week to add significantly to what otherwise would have been a technical discussion on economic models used by the country’s central bank for monetary and other purposes.

Olsen went on to say that monetary policy may need to be relaxed to meet the danger of slower economic growth.

“The Norwegian economy is robust. Government finances are sound, banks are solid, unemployment is low and the economy is growing at a fairly solid pace. At the same time, we must acknowledge that we are influenced by turbulence and weaker prospects internationally. Norway is an open economy. Norwegian firms will be affected if demand slows or funding becomes more difficult. Monetary policy can respond rapidly to changes in the outlook, for example as reflected in Norges Bank’s decision to keep the key policy rate unchanged at the August monetary policy meeting.”


Click here to read the full speech in English or Norwegian.





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