Norway May Keep Interest Rate Unchanged on Krone

Norges Bank will probably keep interest rates unchanged for a fourth meeting after the krone’s strength pushed inflation below target and as policy makers in Europe fail to end the region’s debt crisis.

The bank will leave its overnight deposit rate at 1.5 percent, according to all 14 economists surveyed by Bloomberg. The decision is due to be announced at 2 p.m. today in Oslo.

Governor Oeystein Olsen is trying to balance policy to guide an oil-driven expansion in Europe’s second-largest crude exporter as house prices soar to records. The bank, which has cut rates by 0.75 percentage point since December to keep the krone in check, may signal it won’t be able to stick to its plan to start tightening policy at the end of the year, according to Kjersti Haugland, a senior economist at DNB ASA, Norway’s largest bank.

“We’re looking for a lowering of the interest rate path and we expect Norges Bank to postpone the timing of the first hike until sometime in the second half of 2013,” Haugeland said. The bank is unlikely to tighten earlier than that because of “lower forward rates abroad, a stronger krone” and “lower- than-expected inflation,” she said.

Norges Bank’s room to maneuver has been curtailed by developments abroad as central bankers elsewhere resort to stimulus to boost growth. The European Central Bank plans to expand bond purchases as it struggles to contain the bloc’s crisis, while the U.S. Federal Reserve has announced a third round of quantitative easing. In neighboring Sweden, the Riksbank cut rates last month citing the fallout of Europe’s crisis.

Rates Elsewhere

Falling rate expectations abroad have put pressure on the krone, which has attracted investors seeking a haven from the euro area’s debt crisis. Norway is backed by a $650 billion sovereign-wealth fund and has no net debt. The country, like Switzerland, has opted to stay outside the European Union.

“The main reason that we like Norway is the growth opportunity,” Audrey Kaplan, who manages $532 million at Federated InterContinental Fund, said by phone. “Whether you look at corporate growth or economic growth, it is one of the fastest growing developed economies.”

Kaplan has 12.4 percent of her portfolio in Norway.

Norway’s mainland economy, which excludes oil, gas and shipping, will expand 3.7 percent this year and 2.9 percent in 2013, the government forecast in its budget last month. That compares with a 0.3 percent contraction in the euro area, according to a European Commission forecast.

Strong Krone

Norway’s registered unemployment fell to 2.3 percent in September and wages will grow by more than 4 percent this year, according to government forecasts.

The strong krone, which hit a nine-year high against the euro in August, has kept inflation below the central bank’s 2.5 percent target since mid-2009. Annual underlying inflation, which adjusts for taxes, fees and energy prices, slowed to 1.1 percent last month from 1.2 percent in August.

The krone, which has lost 2 percent against the euro since the bank’s latest rate meeting on Aug. 29, is up about 4 percent against Europe’s single currency since the end of 2011.

The currency gains have raised the cost of Norwegian exports and in part forced companies such as the world’s second- biggest newsprint maker Norske Skogindustrier ASA (NSG) and solar company Renewable Energy Corp. (REC) ASA to cut jobs.

Government Stimulus

The government last month proposed stimulating economic growth in its 2013 budget, adding to the central bank’s dilemma. Finance Minister Sigbjoern Johnsen plans to use 125.3 billion kroner ($22 billion) of the country’s oil fund to plug deficits in its spending plans.

Olsen earlier this year urged the government to tighten the fiscal rule which limits the use of petroleum revenue to 4 percent of Norway’s wealth fund. He called for the rule to be amended to 3 percent, as an over-reliance on oil and gas risks killing jobs in the manufacturing sector.

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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