UPDATE 2-Crown gain will affect Norway, policy-cbanker

Wed Sep 7, 2011 8:14am EDT

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* Says hopes to avoid Switzerland's situation

* Says Norway crown not liquid enough to be a safe haven (adds analyst, background, updates crown)

By Ole Petter Skonnord and Victoria Klesty

ELVERUM, Norway, Sept 7 (Reuters) - Norway's central bank governor admitted the strong crown would have an impact on policy on Wednesday, but stressed he was in no danger of following Switzerland in intervening to weaken it.

The crown continued to rise after surging to an eight-year high on Tuesday as investors sought a new refuge from volatile global markets following the Swiss National Bank's shock move to weaken the franc.

Olsen, whose bank has been eyeing further rises in interest rates that would make the crown even more attractive, said he believed Norway did not have the capacity to become the safe haven for billions in capital the way the Swiss franc has.

"I hope we can avoid a situation like the one in Switzerland, and we are not comparable to Switzerland," he said in a speech. "(The crown) can appear as a safe haven, but it is a tight haven. Norwegian crowns are not liquid enough, we are not big enough."

Speaking to Reuters separately, he said: "We have a policy based on not intervening. That (policy) remains."

Norway is one of Europe's most prosperous countries and has ridden out three years of financial and economic turmoil thanks to its huge oil wealth.

But gains for the crown hurt its export-oriented companies and Olsen said a rise would affect the central bank's key targets and had obviously implications for monetary policy.

"A strengthening of the crown does affect the goals we're aiming at, such as inflation and the economic outlook, production and employment too," Olsen said in a speech.

"The crown strengthened dramatically (yesterday) to a level that is clearly higher than we have based our views on. But I also want to repeat that we do not have a particular crown level that we aim for."

The crown was trading around 7.53 to the euro.

HARD TO HIKE

DnB NOR analyst Camilla Viland said Olsen's comments would help lower expectations for interest rates going forward.

"He confirms that the strong crown affects Norway's economy and will also then affect the central bank's evaluation and decisions, which means it will be more difficult for the central bank to raise rates," she said.

Viland said Norway's relatively strong economy, a high oil price and higher interest rates than in many other countries would likely ensure the crown remained strong.

But she said past evidence showed that the crown, unlike the franc, may suffer when there is a broad fall in global risk appetite.

"The question is whether (the crown) will experience a correction again... I think that unless something very dramatic happens in the markets, there are reasons to believe the crown will stay strong," she said.

The crown's spike in 2002 and early 2003, to a record high of 7.21 against the euro, was quickly reversed when the central bank began to cut rates to reduce the difference in interest rates between Norway and other countries.

The crown stood at 7.5249 at 1107 GMT on Wednesday compared to 7.5480 at 0700 GMT.

Norges Bank surprised markets in August by keeping rates steady while giving no hint in the decision on when it might rise, having made it clear earlier it wanted to raise its main rate by a quarter point to 2.50 percent.

It had also planned to raise rates further but seems to have put those plans on hold in the face of a worsening global economic outlook. Olsen reiterated he would not try to predict where rates go next.

Sweden's central bank also held key rates unchanged at 2.0 percent on Wednesday and lowered its forecast for the rate path ahead.

The Norwegian central bank's next rate decision is due on Sept. 21, and the next monetary policy report is due on Oct. 19. (additional reporting by Terje Solsvik)

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