Norway Set to Keep Main Rate Unchanged to Cap Surging Krone

Norway’s central bank will keep its benchmark interest rate unchanged and signal it will be on hold over the next year to deter investors from buying kroner as Europe struggles with its debt crisis.

The bank will leave its overnight deposit rate at 1.75 percent today, according to 14 of 16 economists surveyed by Bloomberg. It will also probably lower its rate forecast from October, after in December cutting rates by half a percentage point. The announcement is scheduled for 2 p.m. in Oslo.

“Norges Bank will stubbornly focus on the uncertain global outlook and strong krone,” said Erica Blomgren, chief strategist for Norway at SEB AB. “Despite solid domestic data recently we expect Norges Bank to surprise dovishly, lowering the rate path more than expected by market.”

Policy makers in the world’s seventh-largest oil exporter are struggling with a dilemma over how to cool a booming property market and a commodities-driven recovery without spurring krone gains that hurt manufacturers. The currency hit a nine-year high this month as investors snapped up the krone to profit from the higher returns offered in the AAA rated country relative to the euro area.

The krone weakened 0.4 percent to 7.4840 per euro as of 11:12 a.m. in Oslo. It fell 0.5 percent to 5.7283 per dollar.

The economy, home to oil producer Statoil ASA (STL), has withstood Europe’s debt crisis as a jump in crude prices is spurring record investments this year in offshore oil and gas fields. Norwegian manufacturing accelerated at the fastest pace in nine months in February and consumer confidence improved in the first quarter.

Flat Path

The rebound risks stoking a housing bubble, as unemployment hovers at a European low of less than 3 percent. Private debt ratios have risen to their highest since at least 1988, the central bank estimates, while house prices from the Real Estate Brokers Association rose an annual 7 percent.

“We expect them to present an interest rate path that is flat until the first hike comes in March next year,” said Kari Due-Andresen, senior economist in Oslo at Svenska Handelsbanken AB. “The Norwegian economy is very resilient due to the oil.”

Statistics Norway estimates the mainland economy, which excludes oil, gas and shipping, will grow 2.7 percent in 2012. Investments in the nation’s oil and gas industry are estimated to rise to a record 186 billion kroner this year.

Finance Minister Sigbjoern Johnsen said on March 11 that the government will seek to keep spending in check this year and next to avoid putting pressure on the krone and rates.

Growth Picking Up

“Growth is keeping up well in the Norwegian economy,” Johnsen said in an interview. “What has happened around the debt in Greece, and that interest rates are going down in Europe, can contribute to both international and Norwegian growth picking up next year.”

European leaders have been struggling to contain the debt crisis, now in its third year. The European Commission estimates a 0.3 percent contraction in the euro area this year. The European Central Bank held its benchmark unchanged at a record low of 1 percent last week, citing signs of stabilization.

Norges Bank Governor Oeystein Olsen has also signaled his bank will tolerate inflation below its 2.5 percent target as slow demand in Europe and the stronger krone ease price pressure. Annual underlying inflation, which adjusts for taxes, fees and energy prices, held at 1.3 percent in February, Oslo- based Statistics Norway said March 9. Olsen said in his annual speech last month that it may take “several years before the inflation is back on target.”

The central bank expects wages to grow 4.25 percent this year, putting an extra burden on exporters already facing lower demand from the euro area, Norway’s largest trading partner.

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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