Norway Seen Keeping Rates Unchanged After Tempering Krone Gains

Norway’s central bank will probably keep interest rates unchanged after successfully curbing gains in the krone and bringing inflation closer to its target.

Norges Bank will leave its overnight deposit rate at 1.5 percent in a decision scheduled to be announced at 10 a.m. tomorrow in Oslo, according to 21 of the 22 economists surveyed by Bloomberg. One economist estimates the bank will cut to 1.25 percent. DNB ASA and Nordea Bank AB, the two-largest lenders in Norway, predicted the bank will raise its forecast for rates, removing any signal of a reduction this year.

After easing twice, Governor Oeystein Olsen has kept the benchmark unchanged for more than a year while signaling the bank is ready to act to prevent krone strength from undermining its inflation target and the economy. The krone has slid 4.9 percent this year versus the euro as the bank in March warned rates may be cut and the region’s debt turmoil eased.

“The market isn’t prepared for an upward revision of the interest rate forecast,” Erik Bruce, senior economist at Nordea Bank AB, said in a note. “By taking out the rather high probability for a cut in the third quarter and forecast a somewhat earlier hike, market rates should move upwards and the kroner should strengthen.”

Housing Market

While flagging for lower rates, policy makers have been reluctant to cut rates to avoid stoking debt growth even as inflation has held below the 2.5 percent target since mid-2009. Near record-low borrowing costs have helped boost house prices by 24 percent since 2010 and pushed private debt levels to about 200 percent of disposable incomes.

The bank’s efforts to bring inflation toward target by limiting krone gains paid off last month as headline price growth accelerated to 2 percent, the highest since January 2011.

The overheating housing market will keep the bank from cutting rates, Arne Lohmann Rasmussen, chief analyst at Danske Bank A/S, said by the phone.

“They will probably try to underline to households that eventually, rates will go up,” he said.

The weakening krone may also mitigate some of the difficulties brought on by the currency’s 20 percent surge since 2008. Norway, which is western Europe’s biggest oil exporter and has no net debt, emerged as a haven during the debt crisis.

Slowing Growth

The $480 billion economy is starting to suffer from the fallout of the euro area’s shrinking economy, pushing unemployment to the highest since May 2010 as companies grapple with the strong krone and manufacturing labor costs that are nearly 70 percent higher than the average in the European Union.

The central bank also said last week that Norwegian oil suppliers see slowing growth over the next six months and most areas of enterprise in the Nordic country have lowered growth estimates since the start of the year. The bank said that manufacturing focused on Norway, as well as the export industry and retail businesses foresaw “slightly higher” growth, while oil industry suppliers expected slower growth, the bank said.

DNB said it anticipates the central bank will lift its interest rate forecast by 5 basis points to 1.5 percent in 2013, removing a “short-term downward bias” from March.

“In our view, on balance, inflation-related factors and real economic factors will cancel each-other out,” said Kjersti Haugland, a senior economist at DNB, in a note.

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