Last Hawk Among G10 Central Bankers Abandons His Outlier Status

(Bloomberg) -- Oystein Olsen, the governor of Norway’s central bank, has long been an outlier in the world of central banking. But the man once dubbed the last hawk says the pandemic has changed everything.

“Now there are not that many differences” between monetary policy in Norway, the richest Nordic economy backed by a $1.1 trillion wealth fund, and the rest of the world’s major central banks, Olsen said in an interview with Bloomberg Television’s Francine Lacqua and Tom Keene on Thursday.

He spoke not long after surprising markets with a much more dovish statement than expected. The anticipated shift in forward guidance signaling an interest rate hike as early as next year didn’t come. The krone fell as much as 1% against the euro to its weakest since mid-May, and investors sold off Norwegian bonds.

Read: Macro Hedge Fund That Bet on Hawkish Norges Bank Doubles Down

NORWAY REACT: Norges Bank Lifts Rate Path With Dovish Twist

In Thursday’s monetary policy announcement, which saw the bank keeping its main rate at zero as expected, it pointed to a “sharp economic downturn and considerable uncertainty surrounding the outlook.”

“The policy rate forecast is little changed since June 2020 Monetary Policy Report and implies a rate at the current level over the next couple of years, followed by a gradual rise as activity approaches a more normal level,” the bank said.

Norway faces a milder recession than most other countries struggling with the Covid crisis, thanks in part to an effective lockdown strategy and about $13 billion in government support packages. What’s more, its huge sovereign wealth fund has bankrolled record stimulus, without Norway ever having to tap bond markets.

Norway’s enormous fiscal buffers mean there’s less pressure on monetary policy to prop up the economy. It’s the only country in Scandinavia never to have tried negative rates, and Olsen has repeatedly made clear he’s keen to avoid the policy. The bank is still signaling the possibility of a hike in late 2022, which is earlier than other central banks within the G10 currency sphere.

This year’s depreciation in the krone, which is down about 13% against the euro, has contributed to faster inflation in Norway. Underlying inflation was 3.7% in August, the fastest price growth since July 2016 and well above the central bank’s 2% target.

But in Thursday’s statement, the central bank said the krone’s gains since March “and prospects for low wage growth suggest that [inflation] will moderate.” Olsen characterizes the bank’s current rate policy as “unconventional.” He also signaled he’s more focused on the real economy than over-target inflation.

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