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Norway’s Central Bank Keeps Rate Unchanged as Economy Slows

Norway’s central bank kept its benchmark interest rate unchanged for a third consecutive meeting as European leaders struggle to contain a debt crisis that’s threatening the region’s economic recovery.

The overnight deposit rate was kept at 2.25 percent, the Oslo-based bank said today. The decision was expected by all of the 21 economist surveyed by Bloomberg, after a market rout forced policy makers to scrap a planned increase last month.

“Our analysis in June implied a gradual increase in the key policy rate through the final half of the year,” Deputy Governor Jan F. Qvigstad said in a statement. “The turbulence and uncertainty abroad, combined with lower inflation and weaker prospects at home, suggest that the key policy rate should be kept low for a longer period than expected in June.”

The central bank is joining policy makers elsewhere in returning to crisis mode as Europe’s sovereign debt crisis threatens to engulf the region’s banks. Norges Bank has signaled it doesn’t want to stray too far from its trading partners in setting rates as it seeks to stem krone gains. At the same time, the bank needs to limit credit growth as Norway’s financial regulator warns of the risk of a housing bubble.

A Long Period

Norway’s krone weakened 0.6 percent against the euro at 7.7542 as of 2:45 p.m. in Oslo. Versus the dollar, the krone lost 1 percent to trade at 5.6843.

Erik Bruce, an economist in Oslo at Nordea Bank AB, said in a note that the bank will be on hold “for a long period,” while Kyrre Aamdal, an economist at DnB NOR ASA, said he expects rates will be kept “low until March.”

“Low inflation, a weaker growth outlook and lower rates abroad justify that the rate will be kept low longer than forecast,” Aamdal said in an e-mail.

Central banks such as the Riksbank in neighboring Sweden have also scaled back tightening as global growth prospects worsen. The U.S. Federal Reserve last month said it will probably need to keep its rate near zero until the middle of 2013, while the European Central Bank scrapped its increases and resumed bond purchases to counter the debt crisis.

Norges Bank Governor Oeystein Olsen this month warned that the bank may even reduce rates to keep the krone from strengthening too much after it emerged as a haven for investors seeking to avoid the euro-area’s debt woes. The krone’s haven status grew after Switzerland moved to cap franc appreciation.

Krone in Line

“The krone exchange rate has fluctuated considerably,” the bank said. “But so far in the third quarter the krone has on average been broadly in line with that projected in the June 2011 Monetary Policy Report.”

The krone has strengthened about 1.7 percent since the bank’s last policy meeting on Aug. 10, hurting exporters such as Norske Skogindustrier ASA. The world’s third-largest newsprint producer said this week it will lay off workers as krone gains hurt profitability.

The bank’s move to limit damages to exporters risks fueling gains in property prices and a potential real estate bubble in the world’s second-richest country per capita after Luxembourg.

Home prices rose an annual 9.4 percent in August, accelerating from 8 percent growth last year, according to Norway’s Real Estate Brokers Association. Household credit grew an annual 7.1 percent in July, hovering at a 2 1/2-year high, Statistics Norway said. The central bank estimates consumer debt burdens will grow to more than 204 percent of disposable income next year, the highest since at least 1988.

Core inflation slowed last month, easing pressure on rates. Underlying inflation, adjusted for taxes and energy prices, slowed to 0.8 percent in August from 1.2 percent a month earlier. That compares with a target of 2.5 percent.

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