MNI INTERVIEW: Norges's Nicolaisen Sees Tightening Constraints

--Nicolaisen: Currency Moves Could Limit Divergence Between Norges Bank, ECB

Policy

--Nicolaisen: Limits To How Far Policy Can Go In Tackling High Debt, House Price

Inflation Risks

By David Robinson

     REYKJAVIK(MNI) - Norway's central bank faces constraints over how much it

can further increase interest rates due to its growing policy divergence with

the European Central Bank, which could threaten to push up the value of the

krone, Deputy Governor Jon Nicolaisen told MNI.

     While, in an interview in Reykjavik on July 12, Nicolaisen insisted that it

was appropriate for Norges Bank to normalise policy at a time of

higher-than-usual capacity utilisation, he highlighted the difficulty of

tightening at a time when the ECB is once again expected to ease policy.

     Asked if there were limitations on how far Norway's policy rate can diverge

from rates in the eurozone and Sweden, Nicolaisen said: "When we talk about

short rates, one concern is the currency -- in the sense that if you have

exchange rate movements that will affect our output, together with other

factors."

     The spread between Norges Bank's key policy rate, currently at 1.25%, and

the European Central Bank's main refinancing rate, at zero, is the widest since

October 2014.

     "I am not saying that necessarily we would be worried about an

appreciation, or a depreciation for that matter. But that will have an effect

and if it is the only thing that happens, all other things being equal, then

that of course would limit how far we could increase interest rate differentials

before we run into problems with inflation and output, which is our target."

     Nonetheless, so far, the krone has not shown any marked reaction to the

widening rate divergence, with the euro tending to drift higher against the

currency.

     "We are, currently, in the process of raising rates without a large

disturbance from the forex market. So that has not, for, now affected our

decision a great deal," Nicolaisen said.

     Changes in market perceptions of the currencies' relative risk may be one

reason behind the lack of response to policy moves "but that is not to say that

interest rate differentials don't matter," Nicolaisen said.

     --PRIVATE DEBT AT RECORD LEVEL

     In June, the Norges Bank's Executive Board raised its policy rate by 0.25

percentage point to 1.25%, and said it expected to increase it further in 2019.

     "We are not primarily raising rates because of financial stability

concerns, but in the current cycle where the Norwegian economy has reached

normal capacity and we are heading for ... a bit more than normal capacity it is

right to normalise rates," Nicolaisen said.

     In a presentation at the Central Bank of Iceland, Nicolaisen highlighted

the strength of Norwegian house price inflation, with private debt having hit

record highs at a time when government bond yields are at historic lows.

     But he acknowledged to MNI that hiking the policy rate, impacting shorter

term rates, will have limited impact on borrowing.

     "Eventually there is a limit to how much you can prevent people from

lending, if that is what you want to do as long as long rates are as low as they

are, because people basically can just tie their rates to longer-term contracts.

So there is a limit to what monetary policy can do," he said.

     Norges Bank also responsible for financial stability, has imposed a raft of

housing market cooling measures, including a debt-to-income (DTI) limit of five

times a borrower's income and an 85% loan-to-value (LTV) on residential

mortgages.

     "The LTVs typically affect lower income households, typically young people

... and prevents them buying too expensive housing. The DTI ... will affect more

wealthy households because it is focused on gross debt ... So they address

different aspects and therefore we need them both," Nicolaisen said.

     Once again, though, there are limits to how far policy can diverge from

that of Norway's neighbours.

     "If we have regulation, say, for banks that are very different from our

Nordic neighbours one possibility ... is that the banks simply change their

address to a different country ... So, there is a need for Europe to be

more-or-less harmonised in terms of banking regulation," he concluded.

--MNI London Bureau; tel: +44 203-586-2223; email: david.robinson@marketnews.com

[TOPICS: MT$$$$,MX$$$$]