MNI INTERVIEW:Norges Head Hails Retreat Of Expansionary Policy

There has been no formal coordination among advanced economy central banks but the sequence of announcements and steps to reverse recent highly expansionary policy are a welcome development, Norges Bank Governor Oystein Olsen told MNI.

Speaking to MNI after the Norges Bank’s 25-basis-point-rate hike and just before the announcement of the Bank of England Monetary Policy Committee’s 15-basis-point increase, Olsen welcomed the shift in the policy tides, as central banks focus on tackling price pressures.

“We are coming closer to a situation where the very expansionary monetary policy is going to be gradually reversed. That is a positive thing,” Olsen said.

He noted the messages that have come from other central banks, including the U.S. Federal Reserve’s signal Wednesday of more tightening to come.

Asked if this meant central banks were coordinating or just responding to the same price pressures Olsen said “The latter. To my mind there is no coordination except for the fact that the world economy is integrated. We and they, the big ones, communicate at different arenas.”

“There is no formal coordination,” he added.

FISCAL POLICY KEY

Olsen underscored the importance of fiscal policy in allowing central banks to raise interest rates. The extensive, and predictable, support from the Norwegian state, with its strong public finances. has made it easier for the Norges Bank to press ahead with tightening.

Norges Bank decided on its second rate hike since the Covid pandemic hit Wednesday and announced it was lifting the policy rate to 0.50% on Thursday, despite market speculation that it might be deterred from tightening by the new Omicron Covid wave and the reimposition of some social restrictions.

“If there was no response in the fiscal area that would have affected yesterday’s decision,” Olsen said.

The fiscal, rather than the monetary policy response, has been key in supporting the Covid-hit economy.

“You can target the measures, you can design the measures in different ways to counteract the negative impulses. We have no possibilities of doing that in monetary policy,” he said.

The central bank had learned the lessons from the onset of Covid in 2020 including “the importance of the fiscal policy response. That is something which we have now and which we have taken on board and which has influenced how we analyse developments these days,” Olsen said.

Norges Bank’s decision-making body, the Monetary Policy and Financial Stability Committee, has repeatedly cited the housing market as a cause of concern in an ultra-low rate environment, despite borrowers being so far largely able to meet debt repayments.

“Our considerations as regards the housing sector … is primarily related to the build-up of debt,” Olsen said.

“If you take international comparisons, or even historic comparisons, the debt level on Norwegian households is at a level (where only) Denmark and the Netherlands, perhaps, have something similar” and past experience shows “that high debt does not disappear.”

“If that continues and it continues to grow faster than disposable income, that is not sustainable in the very long run … if something happens in the economy, whatever it is, which causes a downturn this high debt level could be a source of a downward spiral in … consumer behaviour,” he said.