Norway Signals Rate May Be Cut to Boost Inflation

Norges Bank signaled an increased chance for an interest rate cut this year as inflation is slower than projected amid weakening economic growth in western Europe’s largest oil producer. The krone slumped.

The overnight deposit rate was kept at 1.5 percent for an eighth meeting, the Oslo-based bank said today. The decision was predicted by 21 of the 22 economists surveyed by Bloomberg, while one had foreseen a cut. The bank predicted that the rate will be 1.38 percent in the fourth quarter of this year and remain below the current level until the fourth quarter of 2014.

“The analyses suggest that the key policy rate be kept lower than projected earlier,” Governor Oeystein Olsen said. “There are prospects that the key policy rate will remain at the current level, or somewhat lower, in the year ahead.”

Norway’s $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 also struggle with a surging krone and manufacturing labor costs that are nearly 70 percent higher than the European Union average.

The krone slid as much as 1.7 percent per euro, and was down 1.5 percent at 7.7900 per euro as of 11:26 a.m. in Oslo. It was the biggest loser against the common currency among the 15 major currencies tracked by Bloomberg.

Nordea Bank AB, the largest Nordic lender, said the new rate forecasts imply a 50 percent chance of a cut in September.

Significantly Lower

“The rate path is significantly lower than we had expected,” said Erik Bruce, an economist at Nordea, in an e-mail. “Norges Bank has revised down its forecast for wage cost growth more significantly than we had expected. Add to this that it has based its forecast on an increase in bank’s lending margins compared to March.”

After cutting twice, Olsen has kept the benchmark unchanged for more than a year while saying the bank is ready to act to prevent krone gains from undermining its inflation target and the economy. The krone has now slid 6.2 percent this year versus the euro as the bank also in March warned rates may be cut.

The bank, which targets 2.5 percent inflation, today said underlying inflation will be below 2 percent through 2016. Mainland economic growth, which excludes oil and gas production, will slow to 2.5 percent this year, before picking up to 2.75 percent next year, the bank also forecast.

Stoltenberg Concerned

“The Norwegian economy is robust and we have secured a different development to that of the other European countries,” Prime Minister Jens Stoltenberg said at a press conference today. “Even so, I’m concerned over three tendencies, increasing unemployment, falling exports to Europe and declining investments in industry.”

Norwegian policy makers have been reluctant to ease further after cutting in 2011 and 2012 as low rates spur household borrowing and push private debt levels to records. House prices in western Europe’s largest oil exporter have doubled since 2002 and private debt burdens will swell to more than 200 percent of disposable incomes this year, the bank estimates.

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

They have also been shackled in keeping rates low as central banks around the world have eased policy to record lows, enacted unprecedented stimulus measures and intervened in currency markets.

The U.S. Federal Reserve said yesterday it will keep buying bonds at a pace of $85 billion a month and said that risks to the economy have decreased. Fed Chairman Ben S. Bernanke also said that the U.S. central bank will probably taper its monthly bond buying later in 2013 and halt purchases around mid-2014 as long as the economy performs in line with projections.

“Norges Bank has become significantly more pessimistic and today’s rate path clearly increases the probability for a rate cut this autumn,” said Kjersti Haugland, an economist at DNB ASA in Oslo. “Our forecast is for the bank to keep rates unchanged until December 2014.”

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