Norway’s Central Bank Signals Rates May Rise Before Summer

Norway’s Central Bank Maintains Benchmark Interest Rate 2%
Oslo-based Norges Bank kept the overnight deposit rate at 2 percent, the bank said today. Photographer: Tomm W. Christiansen/Bloomberg

March 16 (Bloomberg) -- Norway’s central bank kept its benchmark interest rate unchanged while signaling it may start tightening policy earlier than previously indicated as policy makers try to cool credit growth without fueling krone gains.

Oslo-based Norges Bank kept the overnight deposit rate at 2 percent, the bank said today. The decision was expected by 17 of the 18 economists surveyed by Bloomberg. One economist foresaw an increase to 2.25 percent. The krone gained as the bank, which has left rates unchanged since May, raised its forecast for future rate increases “slightly,” Deputy Governor Jan F. Qvigstad said at a press conference. The “normalization” of interest rates is proceeding faster than expected, he said.

“Norges Bank is now indicating that the rate will be raised in May or June and then again in October, December and January, by 25 basis points at each meeting,” said Kyrre Aamdal, an Oslo-based senior economist at DnB NOR Markets.

The bank is trying to steer an economic rebound in the world’s seventh-largest oil exporter without spurring a krone appreciation that may hurt exporters such as Europe’s third-biggest aluminum producer Norsk Hydro ASA. At the same time, Norway’s financial regulator has warned low borrowing costs risk fueling a credit-driven property bubble as house prices exceed a pre-crisis peak.

“The projections in the March 2011 Monetary Policy Report imply that the interest rate should gradually be raised towards a more normal level,” Qvigstad said in the statement.

Jobs, Prices

Europe’s lowest unemployment rate, which slipped to 3 percent last month not including seasonal swings, and house-price growth have yet to feed through to higher consumer prices. Underlying inflation, which adjusts for the impact of taxes and energy, was 0.8 percent in February, and has remained below the central bank’s 2.5 percent target since August 2009.

“Should economic activity or inflation rise more than expected, the increase in the key policy rate may be more pronounced than currently envisaged,” Qvigstad said. “In the event of a marked slowdown in world economic growth, heightened financial turbulence abroad or a further appreciation of the krone, the increase in the key policy rate could be deferred further ahead.”

The bank targets an interest rate interval of 1.75 percent to 2.75 percent until its June 2011 meeting, it said.

Krone Gains

The krone was trading 0.7 percent higher against the euro at 7.8687 at 3:12 p.m. in Oslo. Against the dollar, the krone was up 0.3 percent at 5.6462.

“The currency is key to what they are going to do, as long as inflation is quite low,” said Knut Magnussen, a senior economist at DnB Markets in Oslo. “Obviously they would like to hike rates in the months going forward but that depends very much on the currency.”

Norway’s mainland economy, which excludes income from oil, gas and shipping, expanded 2.2 percent last year and will grow 3.3 percent in 2011, Statistics Norway estimates. Financial Supervisory Authority Director Bjoern Skogstad Aamo said developments in the country’s property market make him “nervous,” in Oslo last week. The regulator estimates that household debt levels are rising faster than incomes.

The central bank today raised its forecast for mainland economic growth for this year to 3.25 percent from 3 percent previously. Output will expand 3.75 percent next year, versus an October estimate for 3 percent, it said. It also raised the outlook for 2013 and now sees 3.25 percent growth versus 2.75 percent previously.

House prices rose an annual an annual 9.2 percent in February, after gaining 7.6 percent in January, according to the Association of Norwegian Real Estate Agents.

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

To contact the editor responsible for this story: Tasneem Brogger at