Norway Cuts Benchmark Rate as Surging Krone Threatens Jobs

Norway’s central bank cut its benchmark interest rate for a second consecutive meeting as policy makers deem the threat of krone appreciation to be more serious than the risk of a credit-driven housing bubble. The krone plunged against the euro and the dollar.

The overnight deposit rate was lowered a quarter percentage point to 1.50 percent, following a half point cut in December, the Oslo-based bank said today. The move was forecast by two of the 16 economists surveyed by Bloomberg. The central bank predicted unchanged rates through March next year.

“The continuing downturn abroad and the strong krone are contributing to keeping inflation low and are weighing on growth in Norway,” Governor Oeystein Olsen said in a statement. “The current outlook suggests that the key policy rate may remain low longer than projected earlier.”

Policy makers in the world’s seventh-largest oil exporter are caught in a dilemma over how to contain a commodities-driven rebound and housing boom without spurring krone gains that hurt manufacturers and kill jobs. The currency reached a nine-year high this month as investors bought the krone to tap higher returns offered by AAA rated Norway relative to the euro area.

Source: Statistics Norway via Bloomberg

Norway's Central Bank Governor Oeystein said, “The current outlook suggests that the key policy rate may remain low longer than projected earlier.” Close

Norway's Central Bank Governor Oeystein said, “The current outlook suggests that the... Read More

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Source: Statistics Norway via Bloomberg

Norway's Central Bank Governor Oeystein said, “The current outlook suggests that the key policy rate may remain low longer than projected earlier.”

Inflation Below Target

The krone fell 1.4 percent to 7.5592 per euro and 1.6 percent to 5.7903 per dollar as of 2:05 p.m. in Oslo.

The central bank forecast showed its key rate would average 1.87 percent in the fourth quarter of 2013 and 2.81 percent a year later. It said underlying inflation will remain below its 2.5 percent target through 2015. So-called mainland gross domestic product will grow 3.25 percent this year, and 3 percent in each of next three years, the forecast today.

“The strong krone is a problem for a lot of exporting industries and it means that inflation will be very low for a long period,” said Erik Bruce, senior economist at Nordea Bank AB in Oslo, before the rate decision.

The krone is the fourth best-performing major currency against the euro and the dollar this year, gaining 3.8 percent and 4.7 percent, respectively, before today’s rate cut. That’s hurting exporters and prompted both the government and central bank to signal they’re ready to act.

Exporters such as Renewable Energy Corp. ASA have announced job cuts as the strong currency hurts competitiveness and demand from debt-burdened Europe sinks.

Imbalances

Finance Minister Sigbjoern Johnsen on March 11 said the government will seek to keep spending in check to avoid putting pressure on the currency and rates.

Still, low interest rates are fueling imbalances in the housing market. Private debt levels have risen to their highest since at least 1988, the central bank estimates, and house prices rose an annual 7 percent last month, according to the Real Estate Brokers Association. Norwegian unemployment hovers below 3 percent, making it the lowest jobless rate in Europe.

The overheated housing market is the biggest domestic threat to the economy, Norway’s Finance Supervisory Authority said in a report yesterday. House prices may fall “markedly,” threatening to expose the economy to “substantial” knock-on effects, the financial regulator said yesterday.

The economy, home to oil producer Statoil ASA, has withstood Europe’s debt crisis as higher crude prices spur record investments this year in offshore oil and gas fields. Manufacturing accelerated at the fastest pace in nine months in February and consumer confidence improved in the first quarter.

Krone gains have damped consumer price growth, giving the central bank more scope to refrain from raising rates. Annual underlying inflation, which adjusts for taxes, fees and energy prices, held at 1.3 percent in February.

Governor Olsen has signaled the bank will tolerate inflation below the bank’s target as sluggish demand in Europe and a stronger krone ease price pressure. Olsen said in his annual speech last month that it may take “several years before inflation is back on target.”

To contact the reporter on this story: Josiane Kremer in Oslo at jkremer4@bloomberg.net

To contact the editor responsible for this story: Jonas Bergman at jbergman@bloomberg.net

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