Norway to raise interest rates gradually, cautiously -central bank chief


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* Norges Bank governor gives wide-ranging annual speech

* Maintains plan to gradually, cautiously raise rates

* But Brexit and global trade conflict pose risks

* Warns against disrupting Norway’s close EU relations

By Terje Solsvik

OSLO, Feb 14 (Reuters) – The Norwegian central bank will continue to raise interest rates if the economy follows current projections, Governor Oeystein Olsen said in his annual speech to government and business leaders on Thursday.

Oil-exporting Norway last year tightened monetary policy for the first time since 2011, lifting its key rate to 0.75 percent from a record-low 0.5 percent as growth and industry capacity utilisation hit four-year highs.

“The effects of the fall in oil prices in 2014 have faded, and both output and employment show solid growth. Underlying inflation is close to the 2 percent target,” Olsen said.

“If economic developments prove to be in line with expectations, the policy rate will be raised gradually and cautiously ahead.”

The biggest risks to Norges Bank’s outlook came from global events, particularly the effects of Brexit and the dangers of a broader trade conflict, according to the speech.

“If growth abroad proves lower than anticipated, there will be spillovers to the Norwegian economy. Uncertainty surrounding the effects of a higher policy rate also suggests proceeding with caution in interest-rate-setting,” Olsen said.

In December, Norges Bank said it planned to make five rate hikes by the end of 2021, with the next one scheduled for March this year.

“While the economic outlook hasn’t fundamentally changed since December, we’ve not yet made a comprehensive analysis to determine what to do at the March rate meeting,” Olsen said in a separate interview at his office in central Oslo on Thursday.

“There is some downside to the international outlook, but on the other hand the information we have so far also confirms that the Norwegian economy is doing well.”

Recent signs of slowdown in the global economy have led some central banks to rethink their stances, most notably the U.S. Federal Reserve which last month said it may end its drive to tighten monetary policy.

The European Central Bank has also warned of weaker economic growth, and while European Union outsider Norway sets its own policy, its rates do not normally stray too far from the ECB for fear of hurting exporters via a currency rally.

On the other hand, the central banks of Sweden and New Zealand were less cautious in policy meetings on Wednesday, surprising traders who had expected more dovish signals.

“If the international economy is hit, be it by China, trade conflict or Brexit, it would be highly unfortunate” Olsen told Reuters.


In the speech, attended by much of the cabinet as well as leading opposition figures and chief executives of major corporations, the governor also warned against jeopardising non-EU Norway’s trading relations with the European Union.

Via membership of the European Free Trade Association’s (EFTA) European Economic Area Agreement (EEA), Norway is part of the EU’s common market — an arrangement that a minority in the Norwegian parliament has sought to renegotiate.

“The EEA agreement is of particular importance,” Olsen said.

“In the years ahead, the multilateral trade system is at risk of being undermined, which may leave us with a more fragmented system … In that situation it would be unjudicious for Norway to compromise its current agreements with Europe.”


The wide-ranging speech discussed how globalisation, digitalisation and structural changes alter people’s lives.

“It is easy to focus on the downsides, but we must also keep our eyes fixed on the big picture: never before have so many taken part in a journey with such a great leap in prosperity,” Olsen said.

The governor rejected cryptocurrencies, arguing their instability and lack of institutional backing made them “unsuitable as monetary units”, while arguing that Norges Bank itself may eventually issue a form of digital currency.

“In the future, central bank digital currency may be necessary for ensuring an efficient and robust payment system. Its most important purpose will be to underpin confidence in the monetary system,” he said.

Reporting by Terje Solsvik; Editing by Catherine Evans


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