Norges Bank Governor Says Force of Economic Rebound ‘Surprising’

(Bloomberg) --

The governor of Norway’s central bank says he’s been surprised by the strength of the economic rebound in his country, as he signals an end to crisis interest rates roughly a year earlier than expected.

“The consumption of services is rising markedly, and consumption of goods has maintained itself all along and is growing now,” Governor Oystein Olsen said in a phone interview in Oslo. “The entire picture is a bit of a positive surprise for us.”

Norges Bank kept its benchmark deposit rate at a record low of zero on Thursday, as expected, after delivering three cuts earlier in the year to steer the richest Nordic economy through the Covid-19 crisis.

But it now expects to be able to raise rates from the second half of 2022, compared with its previous forecast that hikes wouldn’t start until the end of 2023. Norges Bank also sees a milder recession this year than first feared, with mainland GDP set to shrink 3.5%, instead of 5.2%. Next year, the economy will grow 3.7%, it said.

“The important driving force for many positive developments here is of course the positive development in [Covid-19] contagion, which is the basis for reopening society,” Olsen said. “And then, the oil price has come up to a much more comfortable level for us, which impacts oil investments and other factors that stimulate the economy.”

Norges Bank has gone to historic lengths to support the economy this year, wiping 1.5 percentage points off the policy rate, threatening currency interventions and providing banks with cheap credit. As western Europe’s biggest oil exporter, Norway has faced a double crisis, with an unprecedented slump in crude prices adding to the economic devastation caused by Covid-19.

FX Interventions

The economic shock Norway was facing in March sent its krone into a free fall, with its decline against the euro in that month alone reaching 11%. But Olsen said that just telling the market of his intention to step in was enough to support the currency.

“We’ve intervened very modestly,” he said. “The most important, as such, was the announcement that we signed up as a buyer on March 19, quite simply to contribute to the market being priced right. There were hardly any buyers. That’s worked. We’re very clear that the krone market now functions better than it did around March 19.”

Recent data suggest the worst might be over for Norway. The government of Prime Minister Erna Solberg was quick to impose a strict lockdown, bringing Covid-19 contagion rates under control and allowing Norway to reopen much of the economy sooner than others.

What’s more, Norway’s status as the owner of the world’s biggest sovereign wealth fund gives the government considerably more scope to provide fiscal support than many other countries. Solberg’s administration has already pledged record measures to support the labor market and businesses. The government plans to withdraw a record 368 billion kroner ($39 billion) from its wealth fund to cover the extra spending.

Read: Norway Adds $2.8 Billion in Spending to Exit Virus Slump

The Last Hawk

Before the Covid-19 crisis hit, Olsen had established a reputation as one of the last so-called hawks -- someone who favors tighter policy -- within the central banking world. And on Thursday, Handelsbanken described his latest policy signals as surprisingly hawkish.

“I don’t want to describe other people’s choice of words on hawks and doves, and so on,” Olsen said.

“We’re going to have zero rates for two years and a very expansionary monetary policy for two years,” he said. “So I guess there are more hawkish analyses and decisions than this, to put it like that.”

“We see pretty clear signs that the recovery is happening faster than we expected before. But it takes time.”

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