Norges Bank Praises Fiscal Policy in Avoiding Negative Rates

(Bloomberg) --

Norway’s central bank Governor Oystein Olsen said it was hard to envisage having to cut interest rates below zero like other central banks given his country’s fiscal firepower.

In a speech outlining potential measures needed in case there was a severe downturn again, Olsen praised the interplay between fiscal and monetary policy that has been lacking for many of his peers.

“We have room for maneuver in fiscal policy and a tradition of using it in our management of the business cycle,” he said in a speech in Oslo on Tuesday. “If we were to face a situation with a very low policy rate and prospects of persistently low resource utilization, it would be natural for fiscal policy to play a greater role than at an early stage.”

That means “there is less need to steer monetary policy into uncharted waters and risk negative side effects,” he said.

Olsen last month delivered his fourth interest-rate increase in a year in an effort to cool an economy stoked by oil investments. Dubbed by local economists as one of the “last hawks,” Norges Bank has stood out for its commitment to tightening as both the European Central Bank and the Federal Reserve deliver more stimulus.

The country of 5.3 million people with vast oil reserves and a $1 trillion wealth fund built from its fossil-fuel riches, is in many respects “lucky,” Olsen said in an interview last month.

Olsen on Tuesday outlined what other potential tools the bank has at its disposal in case it would approach the zero bound in rates. He largely dismissed buying government bonds, but was more positive to the effectiveness of targeted loans and open to currency interventions.

He left his biggest praise for fiscal policy.

“Fiscal policy can be very effective when the economy is characterized by high unemployment and very low interest rates alone cannot provide sufficient stimulus,” he said. “The side effects of fiscal policy via asset prices are also less severe.”

To contact the reporter on this story: Sveinung Sleire in Oslo at ssleire1@bloomberg.net

To contact the editor responsible for this story: Jonas Bergman at jbergman@bloomberg.net

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