MNI INTERVIEW: Oil Decline May Weigh On NOK: Norges Deputy Gov

By David Robinson

     OSLO (MNI) - Norway's currency may weaken in coming years as the country's

oil industry peaks, Norges Bank's Deputy Governor Jon Nicolaisen told MNI,

noting that the central bank's forecasts of a slight krone appreciation over

2020 faced unpredictable downside risks.

     In addition to concern over the future of the dominant oil sector, elevated

demand for safe haven currencies due to intensified global uncertainty is

another wildcard making forecasting difficult. Norges Bank's latest krone

projection is for a slight appreciation over its three-year forecast horizon,

Nicolaisen said in an interview.

     In its June Monetary Policy Report, Norges Bank forecast a near 2%

strengthening of its import-weighted exchange rate (I-44) in 2020 compared to

2019. But the krone had fallen by around 2% by the time the central bank

produced its September MPR.

     " What we said in our September report .. (is that) there are two forces at

play here and it is hard, or almost impossible, but at least hard, to

distinguish what forces are important at what time," Nicolaisen said.

     "There have been a lot of changes in the way international markets work,

partly because of uncertainty, so that adds to risk premia in an unpredictable

way and leads to moves to so called safe haven currencies," he said.

     "The krone is in relative terms a small relatively illiquid currency

compared to big ones like dollar and yen," he added.

     Another complicating factor is the prospect for the long-term decline of

the nation's powerful oil sector, which has helped drive economic growth and led

to extraordinarily strong public finances.

     "The markets may focus on challenges ahead for the Norwegian economy

because of the peak in oil investment and the gradual decline of oil production

in the years ahead ...and that could effect more long-term equilibrium

variables, which could also lead to ... a real depreciation of the krone, at

least compared to the high levels we saw before 2014," he said.

     Second only to the Swedish krona, the Norwegian krone has been the poorest

performing currency in G10 across 2019, falling over 5.5% against the U.S.

dollar and close to 2% versus the euro. Further currency weakness would, all

else equal, push up on inflation, with Norges Bank's latest forecasts showing

the rate of increase in consumer prices holding just above the 2.0% target in

2020 through 2022.

     Academic literature has highlighted the difficulty of producing any

currency prediction that consistently beats the assumption that exchange rates

will hold steady but Nicolaisen downplayed the case for switching to using a

flat krone forecast, pointing out that the appreciation predicted by Norges Bank

was only modest.

     --DIGITAL CURRENCIES

     Speaking to MNI at a conference in the outskirts of Oslo on payment systems

and central bank digital currencies, he said he did not foresee a CBDC

materialising any time soon.

     "My (Riksbank) colleague Henry Ohlsson .. said this is still going to take

a while - to say the least. It is a long-term project, for us. We still haven't

decided anything in terms of actually introducing it and, if so, what the

solutions are technically. There is a lot of work to be done .. before we get

close to actually introducing it," he said.

     While some have argued that the introduction of digital currencies would

facilitate the setting of negative interest rates, he dismissed this notion as

"a bit of a sideshow."

     Rather, a more compelling rationales for developing a CBDC would be as a

contingency plan "in case something goes wrong with the payments system," he

said.

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

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