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Norges Bank Predicts Rate Rise as Economy Remains Resilient

Norway Keeps Key Rate Unchanged as Record Krone Hurts Exports
Pedestrians pass the closed entrance to the Norges Bank in Oslo. Photographer: Tomm W. Christiansen/Bloomberg

Norges Bank kept its benchmark interest rate on hold for a fifth meeting and stuck to a plan to raise interest rates as soon as March amid “solid” growth in western Europe’s largest oil producer.

The overnight deposit rate was left at 1.5 percent, the Oslo-based bank said today. The decision was forecast by all 16 economists surveyed by Bloomberg. The bank said today that developments were “broadly in line” with projections in October, when it predicted an increase in March at the earliest.

“Developments in the Norwegian economy give reason to believe that inflation will gradually pick up,” Deputy Governor Jan F. Qvigstad said in a statement. “This suggests that the key policy rate can be raised further out.”

Policy makers are keeping rates close to record lows following two cuts over the past 12 months as the krone’s strength threatens exporters in the Nordic nation. Norway, which is backed by a $660 billion wealth fund and boasts the largest budget surplus of any AAA rated nation, has provided investors refuge from Europe’s debt crisis, pushing the krone to an all-time high. At the same time, low borrowing costs coupled with falling unemployment have fueled household credit growth and sent house prices to records.

Krone Gains

The krone gained 0.4 percent to 7.3721 per euro as of 2:20 p.m. in Oslo. Versus the dollar, it surged 1 percent to 5.5420.

“Growth among our trading partners is weak and interest rates abroad are very low,” the central bank said. “Inflation in Norway is low. Against this background, the key policy rate is left unchanged.”

The import-weighted krone index reached 85 last week, its highest since at least 1999. The index, up 4.6 percent this year, has surpassed the bank’s 85.75 forecasts for next year. A lower reading indicates a stronger currency. Gains have pushed inflation well below the central bank’s 2.5 percent target.

“Norges Bank has been pretty clear on its priority: the inflation mandate,” Frank Jullum, chief economist for Norway at Danske Bank A/S, said before the decision. “We will probably see the housing market issues being left to macro regulation in 2013. This should take some burden off Norges Bank.”

Mortgage Risks

The Finance Ministry this week moved to stem credit growth, after the central bank estimated private debt levels will exceed 200 percent of disposable incomes in 2013. The government proposed an increase in risk weights on mortgages to 35 percent, about triple current levels, and wants to place limits on covered bond lending. The central bank will also, starting next year, advise the ministry on countercyclical buffer requirements for banks.

The world’s fourth-richest nation per capita is withstanding a recession in the euro area, and even displaying signs of overheating, amid record investment in Norway’s petroleum industry. House prices have doubled since 2002 and are up an annual 7.6 percent this year, according to the Norwegian Association of Real Estate Agents.

Weak global growth prospects abroad have curtailed the central bank’s scope to address overheating risks without fueling krone gains. Central bankers in the euro area, the U.S. and Japan have resorted to additional stimulus, pushing rate increases further out in time.

Sweden’s Riksbank yesterday cut its benchmark interest rate for a fourth time in a year, bringing the rate to 1 percent, to revive growth as Europe’s debt woes erode export demand.

“We don’t think Norges Bank will increase rates until 2014, because of the strong krone and extremely low international rates,” said Kjersti Haugland, an analyst at DNB Bank ASA, in a note to clients.

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