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MNI INTERVIEW: Norges Bank Chief Says Rate Hike Lead Temporary

MNI (London)

Norges Bank is more able to tolerate deviations from its inflation target than its peers, Governor Oystein Olsen tells MNI.

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Norges Bank was able to move ahead of other advanced economy central banks and hike its policy rate Thursday in part because of its ability to tolerate deviations from its inflation target, but its gradual approach to tightening means others could catch up, central bank Governor Oystein Olsen told MNI.

The differential between the Norwegian and U.S. policy rates could fade to zero in three years if expectations of policymakers on both sides are met, said Olsen, noting in an interview that the weight placed by Norges Bank on financial stability allowed it it to press ahead and tackle risks generated by a prolonged period of zero interest rates.

Norges Bank' Monetary Policy and Financial Stability Committee lifted its policy rate from zero percent to 0.25% at its September meeting and stated that the next hike was likely to come in December, with the rate at the end of the three-year forecast horizon seen close to 1.7%.

This is a gradual rate of hiking, said Olsen, stressing that there was no desire for a swift return to the neutral rate, the level which is compatible with medium-term economic balance.


"Our estimate of the neutral rate is close to 1.7% and we see that first at the end of the (forecast) period. One year ahead the policy rate in our forecast will be 1.0% and that's still well below the neutral rate … There is no wish as such to return to the neutral rate at any point in time."

Olsen noted that while Norges Bank has been first to hike, the 'dot plot' published Wednesday also showed Federal Reserve policymakers expect rates to rise to similar levels three years down the track.

Norges Bank projects that its target inflation measure, CPI-ATE which excludes energy prices, should remain below the 2.0% goal until the very end of its three-year forecast period. CPI inflation is seen shown peaking at 3.9% in November this year, before falling to 1.2% year-on-year in 2023 and converging with underlying inflation in 2024 at 1.9%.

Olsen defended the use of a core inflation target rather the headline CPI used elsewhere.

"Monetary policy should be forward looking. It is wise and it is useful to focus more on core inflation," he said, adding that energy prices fluctuate and central banks and in the end the gap between core and non-core measures evaporates.

"Both headline inflation and core inflation converge towards 2% at the end of the (forecast) period," albeit from different sides, he said.

Also "as a central bank I think it is correct to say that we are more flexible and less worried about not adhering exactly to the 2% target."

"We think we can live with moderate deviations from 2% on both sides, so I think we are more flexible. As part of that we are also 'leaning against the wind'. We put slightly more weight on financial stability vulnerability than some others," he said.


Norges Bank cites high house price levels, which feed through to high household debt levels as a financial stability risk which could be exacerbated by ultra-low interest rates.

"We refer to financial stability risks because they could build up again … We also refer to them as sort of an additional argument (for tightening) given the fact that opportunities for development in the real economy point to a normalisation in the policy rate," Olsen said.

He noted that there was already evidence of cooling in the housing market.

"We are much more comfortable now than we were, say, six months ago" when property prices increased sharply during the Covid pandemic, fuelled by the zero-policy rate as "we have seen a moderation," Olsen said.

Olsen stressed that oil-rich Norway's government finances gave the central bank more policy freedom than its counterparts.

"We have had, and still have, significant room for manoeuvre in fiscal policy which helps for many reasons," Olsen said.

Norges Bank policymakers, unlike those at neighbouring Riksbank, also feel free to diverge significantly from the European Central Bank, which investors see as likely stuck with low rates for some time.

"The Norwegian economy is special. It has some strong elements ... We are still oil dependent, for good and for bad, mostly for good … I would say, and as a consequence we have over the years demonstrated that we are not as tied to the ECB, the euro area, as some others," he said.