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Rates firm as critics bash oil fund use

The executive board of Norway’s central bank has decided, as expected, to keep its key policy rate unchanged at 0.5 percent. Øystein Olsen, governor of Norges Bank, cited a lack of “substantial deviation” from economic projections, just as a chorus of other critics wailed that the Norwegian government is using far too much of the country’s oil revenues that Olsen also oversees.

The Central Bank of Norway Governor Øystein Olsen, speaking at another even earlier this month. On Thursday night he used his annual address on the state of the Norwegian economy to warn against governments supporting failing banks. He called for better systems, both internally and nationally, to wrap up failing banks and protect the economy. PHOTO: Nils S. Aasheim/Norges Bank
Norges Bank Governor Øystein Olsen said there wasn’t enough deviation from economic projections to warrant another interest rate cut now. Debate swirled, meanwhile, over the government’s use of oil money to stimulate the economy. PHOTO: Nils S. Aasheim/Norges Bank

The central bank board conceded on Thursday that consumer price inflation remains elevated, but it also claimed that a stronger Norwegian krone “may contribute to a slightly more rapid decrease in inflation than projected in March.” The board believes a rise in oil prices, meanwhile, may reduce uncertainty and contribute to somewhat higher growth in the Norwegian economy.

“An overall assessment of new information indicates that the key policy rate should be kept unchanged at this meeting,” Olsen stated in the bank’s press release.

Fully 13 out of 14 economists polled by newspaper Dagens Næringsliv (DN) had predicted that the central bank board would refrain from another interest rate reduction. Professor Steinar Holden at the University of Oslo, for example,  told DN that there was still a need for low interest rates because of the economic slowdown resulting from the dive in oil prices. Those prices have been rising again lately, however, and Holden believes that interest rates even lower than 0.5 percent could have “unfortunate” effects, like increasing debt levels further and yielding far too little return on savings. The Norwegian economists thus concluded that interest rates were “low enough” for now, even though some still predict they may be cut by another quarter-point later this year.

Debate rages over use of oil revenues
Norway’s economy and the government’s latest response to handling it, meanwhile, remained hot topics in local media on Thursday, a day after Finance Minister Siv Jensen presented a revised national budget. Her decision to once again dip into the so-called “Oil Fund” where oil revenues have been stashed for 20 years to secure future pensions, was being widely assailed by opposition politicians and many media commentators.

Even though Jensen could spend much more of the Oil Fund’s money under current rules, she was criticized for using “too much,” as DN editorialized. Its commentators pointed out that every eighth krone spent in the state budget is now coming from the Oil Fund. “The Norwegian economy is becoming, in other words, even more dependent on oil than it already is,” DN wrote. “And the increased expenses that will come from an ageing population … will be even more difficult to finance.”

‘Shattering the piggy bank’
Other headlines accused Jensen of “shattering Norway’s piggy bank,” while Labour Party bosses and trade union federation leader Gerd Kristiansen, who’d demanded NOK 5 billion in extra state spending to reduce unemployment continued to accuse Jensen of “poor financial management.” They would have preferred to cut the budget in other areas, and presumably let the government take the blame for the criticism that would also set off.

Still other commentators worried that Norway’s huge Oil Fund, which long has ranked as the largest sovereign wealth fund in the world, faces “an insecure future” because the state is now using “record amounts” of its current balance. While they conceded that it can be defensible to tap the fund’s reserves in the current downturn, to stimulate the economy, newspaper Aftenposten warned, for example, that “temporary” tapping of the fund can quickly become permanent practice.

Money for a rainy day, when it’s pouring
Jensen has her defenders, though, not least among those benefiting from how the oil money is being spent. Even a Labour Party mayor from Sandnes in Rogaland, Norway’s oil hub, expressed gratitude for the extra funding his community will be getting to offset the ill effects oil industry cutbacks. He praised Jensen, in contrast to his own party boss Jonas Gahr Støre who blasted her efforts to address the very unemployment he worries about.

Others noted that even though the total amount of Norway’s petrokroner being tapped is larger than ever before, it still amounts to just 2.8 percent of the total size of the Oil Fund, while the rule restricting use of oil fund money has long been set at 4 percent. The fund also continues to grow, even with less new oil money flowing into it, because of the returns on its investments.

‘Can’t continue’
By the end of the day, Norway’s krone had strengthened and oil prices rose again, up to nearly USD 47 a barrel Wednesday evening, while other sectors of the Norwegian economy have remained strong all along. Norway’s oil and economic “crisis” is thus highly relative compared to most countries, with even Jensen’s critics admitting that Norway’s economy has actually held up well since oil prices started to fall.

Economists remain cautious: Jensen’s oil fund tapping “can’t continue,” warned Harald Magnus Andreassen, chief economist at Swedbank, in DN. Of 10 economists polled by DN, only one gave Jensen and her budget top marks. The rest gave her only passing grades, averaging 3,7 on a scale of one to six, with seven of the 10 agreeing that the government’s use of oil money was “higher than what can be defended in regards to the state’s finances in the long term.” Berglund



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