March 2, 2018 / 11:12 AM / in 4 months

Norway cuts inflation target to 2 percent, triggers crown rally

OSLO (Reuters) - The Norwegian government cut the central bank’s inflation target to 2 percent on Friday, sending the crown higher as it aligned the country with key trading partners by ditching the 2.5 percent goal that had stood for 17 years.

File illustration picture of Norwegian banknotes and coins of different denominations, taken in Trondheim October 31, 2008. REUTERS/SCANPIX Gorm Kallestad

Under a new mandate, Norges Bank also formalized a long-standing custom of taking into account economic growth and labor market developments when setting interest rates, the finance ministry said.

“Inflation targeting shall be forward-looking and flexible so that it can contribute to high and stable output and employment and to counteract the build-up of financial imbalances,” the ministry wrote in a statement.

Sweden, Britain, the United States and the European central bank all target inflation of around 2 percent.

With market players appearing divided on whether the shift would mean a faster pace of rate hikes, the crown currency rallied about 1.5 percent, hitting a five-week high of 9.5425 against the euro before edging back down to around 9.5845 by 1126 GMT.

The new regulation offers a clearer picture of Norway’s monetary policy and underpins the central bank’s flexible approach to inflation targeting, its Governor Oeystein Olsen said in a separate statement.

The bank believed it would not lead to significant changes in the conduct of monetary policy.

Norway, an oil and gas producer, introduced an inflation target in 2001, at a time when it planned to phase in large revenues from its energy industry.

With that period largely passed, “there are no longer any compelling arguments for targeting a higher inflation rate than other countries,” Finance Minister Siv Jensen said.

DNB Chief Economist Kjersti Haugland said the decision was surprising.

“The market believes the central bank will raise rates at a faster rate than before,” she said, while adding that it was not yet clear if this would actually be the outcome.

Nordea economist Erik Bruce said the effect on monetary policy should be modest.

Norway’s core inflation, adjusted for energy prices and taxes, stood far below both target rates in January at just 1.1 percent.

The key policy rate stands at a record low 0.5 percent and the central bank has said it aims to raise borrowing costs in late 2018 as economic growth accelerates.

In December, Norges Bank forecast that core inflation would rise to 2.1 percent by 2020, the final year of its forecast horizon.

Writing by Terje Solsvik, editing by Gwladys Fouche and John Stonestreet

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