Norway's central bank governor Olsen discussed the use of unconventional monetary policy tools in his speech on Thursday. He stated that the Norwegian economy is in a completely different situation than the euro zone, the US and UK, and that Norges Bank hence will stick to the conventional tool: the key policy rate. He repeated his message that a krone that is too strong, which can lead to too low inflation and too sluggish growth, will be met with rate cuts, not FX interventions. The latter is "not in principle an instrument suited to influencing the krone exchange rate over a longer period". However Olsen did not rule out interventions altogether. It would only be relevant should the krone exchange rate move significantly out of line with fundamentals, and if the credibility of the inflation target is threatened. In addition, the interest rate weapon must have already been exhausted.
Olsen acknowledges that the high household debt burden in Norway represents a risk of financial instability in the longer term. He is not ready to take the responsibility for curbing the brisk developments in the housing markets. Firstly, monetary policy cannot aim to redress the real economic imbalances that have arisen since the number of housing completions remains low in relation to population growth. He acknowledges that low interest rates over time can increase the risk of driving up debt levels and asset prices. However, there is – with one instrument available – the key policy rate – a limit to how many tasks can be assigned to monetary policy. In order to counter financial imbalances, instruments in addition to those available to monetary policy must come into play. He points to macro prudential regulation of the financial industry, like countercyclical capital buffers for banks, as such instruments.
Assessments: Norges Bank's current interest path implies that the key policy rate will be hiked by 0.25 percent to 1.75 percent at a point between December 2012 and the summer of 2013. We believe that the hike will be delayed until October 2013, due to low international forward rates, recurrent waves of financial turmoil and a strong NOK.
