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INTERVIEW-UPDATE 2-Challenges await Norway's new c.banker

Published 01/03/2011, 08:48 AM
Updated 01/03/2011, 08:52 AM

* Olsen vows to retain bank policy targeting inflation

* Says has no view on crown as it hits 7-month peak vs euro

* Says Norway faces challenge as euro zone recovery lags

* Analysts: crown, house prices pull in different directions

* Insider TV interview: http://link.reuters.com/xeb54r

(Adds analyst more quotes, context)

By Wojciech Moskwa and Camilla Knudsen

OSLO, Jan 3 (Reuters) - Norway's central bank will keep its focus on inflation and its policy pattern steady, new Governor Oeystein Olsen said on Monday as the Norwegian crown hit highs and property price growth was forecast to accelerate in 2011.

Olsen takes over Norges Bank with policy delicately poised. On the one hand the strong crown is restraining inflation and easing pressure for rises in interest rates, while on the other the economy gains speed and housing prices bubble higher.

Add to the mix uncertainty over the broader European economy, where 60 percent of Norway's exports go, and the global impact of a flood of cheap capital from the United States, and Olsen's honeymoon as governor could be short.

"Imbalances and problems in the international economy mean that the Bank can expect fresh challenges ahead in many of its primary areas," Olsen said on Monday, his first day on the job.

Norwegian industry is concerned that hot money flows could further strengthen the crown and price it out of export markets, especially as official projections show Norway raising its main rate from the current 2.0 percent around mid-2011.

The crown on Monday rose to its highest level against the euro since last May and is up 6 percent since October, helped by strong energy export prices as well as the expectations of higher official rates.

Scandinavia's other free-moving currency, the Swedish crown , hit a six-year high against the euro on Monday. Its central bank governor said in minutes published separately that it could not let the currency drive policy.

"I have no view on whether the Norwegian crown is on the strong side or on the other side," Olsen said in an interview with Reuters Insider television. "We have one target and one goal -- to secure low and stable inflation."

Asked about his view on forex market interventions, he said: "Norges Bank does not make currency interventions."

DIFFERENT DIRECTIONS

Olsen pointed to the policy challenge the bank would face if Norway's growth significantly exceeded that of a crisis-hit euro zone. Analysts say that could mean the bank might have to raise rates by more than planned, risking more gains for the crown.

"These different developments must be balanced in economic policies and monetary policy in particular," Olsen said, but would not be drawn out on whether he would oppose a further widening of the rates spread between Norway and the euro zone.

Finance Minister Sigbjoern Johnsen told Reuters last month that Norway should keep a low rate differential with the euro zone, whose main rate stands at 1.0 percent.

Core inflation was also at 1.0 percent in November, compared to the bank's 2.5 percent target, but industry data on Monday showed housing prices rose 6.7 year-on-year in December and were expected to rose 8 percent in 2011.

Olsen was previously the head of a statistical agency that has been more bullish on Norway's growth prospects than the central bank, signalling that rates could be raised sooner than Norges Bank's previous forecasts. But Olsen played down any policy impact of his arrival at the helm of the bank.

"Today... my main message is that our system of flexible inflation targeting is well anchored and it's going t be continued," Olsen said, adding that inflation-targeted monetary policy had helped stabilise Norway's highly cyclical economy.

"It can be assumed that the bank's policy response pattern will continue," Olsen said in a statement.

Asked if the central bank's economic outlook will change, Olsen said: "No, not at all. It is necessary to continue the robust and necessary work done by the bank's employees and the previous governor."

"I also stress for those that follow monetary policy particularly closely, you should assume that the reaction pattern of Norges Bank -- given the inflation target -- is recognised and is going to be continued."

(Editing by Patrick Graham)

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