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Norges Bank Signals Credit Risk May Be Bigger Threat Than Krone
The record debt burden of Norwegian households may be a bigger threat to the economy than the risk posed by a strengthening krone, central bank Deputy Governor Jan F. Qvigstad signaled.
The krone has slumped 6.7 percent against the dollar after the bank on Sept. 8 warned that it is willing to take “monetary policy measures” to keep the currency from becoming “too strong.” The krone lost 2.9 percent against the euro and 7.6 percent against the yen. The bank said yesterday the krone was in line with its forecast for the third quarter after leaving its benchmark deposit rate unchanged at 2.25 percent.
The success in stifling gains amid an investor search for havens may give policy makers room to deal with domestic challenges. The biggest of these could be the threat of a credit-driven housing bubble, Morten Baltzersen, director general of Norway’s financial regulator, said last week. Housing investment has shown a “substantial increase” as home prices continue to rise, the bank said.
“We share that concern and follow it closely,” Qvigstad said yesterday in an interview in Oslo. “The housing market and credit is one of the most important variables and markets that we follow when we set interest rates.”
‘Largest Worry’
Europe’s lowest unemployment rate, at 2.7 percent, and estimated wage growth of more than 4 percent this year are fueling demand for credit in Norway and has pushed property prices up beyond pre-crisis records. House prices rose an annual 9.4 percent in August, accelerating from 8 percent growth last year, according to the country’s Real Estate Brokers Association. Household credit rose an annual 7.1 percent in July, hovering at a 2 1/2-year high, Statistics Norway said.
“They will continue to monitor the development in the krone because it’s an important variable for inflation but they are even more worried about the housing price development now,” Kjersti Haugland, senior economist at DnB NOR ASA and a former central bank analyst, said by phone yesterday.
The bank yesterday signaled rates will probably stay unchanged for the rest of the year amid slowing global growth and with policy makers in Washington, Frankfurt and Stockholm also on hold. While a rate cut may be possible if the global economy deteriorates, Qvigstad also said he “will not rule out an increase this year.”
The central bank estimates consumer debt burdens will grow to more than 204 percent of disposable income next year, the highest since at least 1988.
Norway in the early 1990s seized control of its biggest banks, in part because of a real estate slump that followed a surge in lending growth triggered by deregulation in the 1980s.
“Households are getting increasingly vulnerable to shocks,” Haugland said. “If something unexpected, a shock, hits the Norwegian economy, the turnaround might be very abrupt and lead to a very strong and abrupt fall in the Norwegian economy.”
DnB expects the bank to raise rates again in March, Haugland said.
Finance Minister Sigbjoern Johnsen this month met with the nation’s top bank executives to explore the need for stricter lending rules in an effort to curb credit growth.
“The longer these developments go on, the further it goes, the higher is the risk of a bubble,” Baltzersen said.
To contact the reporter on this story: Josiane Kremer in Oslo at jkremer4@bloomberg.net
To contact the editor responsible for this story: Tasneem Brogger at tbrogger@bloomberg.net
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