Norway Seen Signaling Higher Rates After Halting Krone Rally

Norway’s central bank will probably signal it will raise interest rates sooner than previously predicted next year and scrap a probability it will ease after prevailing in its battle to weaken the krone.

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 all 19 economists surveyed by Bloomberg. DNB ASA, Nordea Bank AB, Svenska Handelsbanken AB and SEB AB, all primary dealers that trade with the central bank, predict that the bank will revise its rate forecast higher.

“We think the rate path will be raised by up to 75 basis points, and that it will imply a rate hike already in March next year,” Erlend Loedemel, chief economist at Arctic Securities, an Oslo-based investment bank, said in an e-mail. “We suspect the krone could strengthen and that interest rates will rise slightly.”

Governor Oeystein Olsen has kept rates unchanged for more than a year while signaling as recently as June that policy makers were prepared to ease to prevent krone strength from hurting exporters and cooling inflation too much. The krone has since slid and underlying inflation in western Europe’s biggest oil producer surged to 2.5 percent in August, hitting the target for the first time in four years.

The krone was little changed at 7.8912 per euro as of 10:13 a.m. in Oslo.

‘Upside Bias’

The bank in June predicted that its benchmark 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 forecast at the time implied a 50 percent chance of a rate cut this month, according to Nordea Bank.

“We expect a higher interest rate path, due to higher inflation and a weaker krone,” said Kyrre Aamdal, an analyst at DNB, Norway’s largest bank. “We forecast a near-term upside bias and the first hike in the third quarter 2014.”

Bets on lower rates have evaporated. Three-month forward-rate agreements maturing in March 2014 rose to about 1.79 percent yesterday, up from 1.67 percent in mid-July. The contract settles to the Norwegian interbank offered rate, which was at 1.74 percent. The contract maturing in December next year traded at 2.10 percent, signaling a quarter-point increase.

The krone has lost almost 7 percent against the euro this year, paring some of the gains since 2009. The krone slid on rate warnings and as it lost its haven allure after the euro area emerged from its record recession in the second quarter. On a trade-weighted basis the krone hit the highest since at least 1999 in February, and has since weakened 6.3 percent.

Advising Against

A potential move toward higher rates comes as Norway’s $500 billion economy is struggling with a slowing expansion just as the rest of Europe surfaces. The central bank said last week that most areas of enterprise in the country, including oil suppliers, have lowered growth estimates since the start of the year and predicted “moderate growth” over the next six months.

Bernt Christian Brun, chief strategist at Danske Bank A/S in Oslo, said in note that that the bank will at most revise its rate path to 1.5 percent over the next couple of months , and is likely to keep a probability for a cut over “the next months.”

The country’s main business group, NHO, warned yesterday that it would be the wrong time to start guiding for higher rates as the krone’s slide has provided relief. The Norwegian Confederation of Industry forecast that the mainland economy, which excludes oil and gas output, will expand 2 percent this year and next year. Unemployment will be 3.75 percent this year and rise to 4 percent next year, NHO said.

“Any talk of raising interest rates would be detrimental to economic developments and we would advise very strongly against it,” said Dag Aarnes, a director at the business group, in an interview. “If it’s lasting and if the kroner settles at a lower level, that would be a good thing for Norway. Many of our export businesses are under a lot of pressure these days.”

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