Norway Central Bank Delays Plans to Tighten Monetary Policy

Norges Bank pushed back plans to tighten monetary policy and said it probably won’t start raising interest rates until March at the earliest.

The bank, which had previously signaled rates may rise as early as December, kept its benchmark interest rate at 1.5 percent for a fourth meeting as policy makers struggle to balance the risks posed by Europe’s debt crisis and an overheated domestic economy. Today’s rate decision was forecast by all 14 economists surveyed by Bloomberg.

“The key policy rate is being kept at a low level because inflation is low and global interest rates are at very low levels,” Norges Bank Governor Oeystein Olsen said in a statement. “Growth among Norway’s trading partners is weak and the uncertainty surrounding developments in the international economy is elevated.”

Policy makers are keeping rates close to record lows following two cuts over the past year after the krone’s strength hurt exporters struggling to stay competitive. At the same time, Norway’s Financial Supervisory Authority has warned that Europe’s second-biggest oil exporter may be in the grip of a housing bubble after low borrowing costs spurred credit growth and sent private debt loads to almost double average after-tax incomes.

October 2013

“The rate path that the bank has put forward shows a small probability of a rate increase in the second quarter, with the greatest likelihood of a rise in the third quarter,” Ole Andre Kjennerud, an economist at DNB Markets, said in an e-mailed note. DNB expects the central bank to keep its main rate unchanged until October next year, after which gradual tightening will start, he said.

The krone, which gained as much as 0.7 percent against the euro earlier today, was trading 0.4 percent higher at 7.3948 per single currency unit as of 2:54 p.m. local time. Versus the dollar, the krone was up 0.7 percent at 5.6919, after trading as much as 1 percent higher earlier in the day.

The central bank’s executive board decided that the policy rate should be in an interval of 1 percent to 2 percent through March next year, “unless the Norwegian economy is exposed to major new shocks,” the bank said. Policy makers didn’t consider cutting rates today, Olsen told reporters after the decision was announced.

Global Outlook

Weak global growth prospects have prompted central bankers in the euro zone, the U.S. and Japan to resort to stimulus, pushing rate increases further out in time. That’s limited scope for tightening in Norway, where Olsen has signaled he doesn’t want rates to stray too far from levels elsewhere.

“Developments in the Norwegian economy give reason to believe that inflation will gradually pick up,” Olsen said. “The analyses in this report suggest that the key policy rate should be kept at today’s level into next year, followed by a gradual increase towards a more normal level. The forecast for the key policy rate in 2013 is slightly lower than the June forecast.”

Gains in the krone, which hit a nine-year high against the euro in August, have 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.

Currency Gains

The currency’s appreciation has also raised the cost of Norwegian exports. Companies such as the world’s second-biggest newsprint maker Norske Skogindustrier ASA (NSG) and solar company Renewable Energy Corp. (REC) ASA have cut jobs to stay competitive.

Meanwhile, the domestic economy continues to show signs of overheating. House prices rose an annual 7.3 percent in September, the Norwegian Association of Real Estate Agents estimates. Registered unemployment fell below 2.5 percent last month as retail sales rose 0.7 percent in September from August, more than economists surveyed by Bloomberg had predicted. Household credit growth was 7 percent last month, the statistics agency said today.

Norway’s mainland economy, which excludes oil, gas and shipping, will expand 3.7 percent this year as an oil sector boom filters through to the rest of the economy, boosting wages. That compares with the European Commission’s estimate for a 0.3 percent contraction in the debt-laden euro area.

While Norges Bank is trying to balance policy to guide an oil-driven expansion, in neighboring Sweden, the Riksbank last month cut its benchmark to the lowest level since early 2011.

As Olsen responds to the threats facing Norway by leaving rates on hold, “the risk is apparent that Norway in the medium term will develop precisely the domestic imbalances that the bank itself has warned against,” Carl Hammer, a currency strategist at SEB, said in a note before the decision.

To contact the reporter on this story: Josiane Kremer in Oslo at

To contact the editor responsible for this story: Jonas Bergman at

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