Norges Bank Signals Faster Rate Increases After Taming Krone

Norges Bank left its benchmark interest rate unchanged and signaled faster tightening after efforts to fight back the krone’s appreciation were successful, freeing policy makers to focus on an overheated housing market.

The deposit rate was kept at 1.5 percent for a ninth meeting, the Oslo-based central bank said today, as predicted by all 19 of the economists in a Bloomberg survey. The bank sees rates at 1.5 percent at the end of this year and at 1.57 percent in the first quarter, compared with the 1.38 percent forecast in June. The rate will be 1.74 percent at the end of 2014, compared with 1.58 percent previously.

“The analyses imply a key policy rate at today’s level in the period to summer 2014, followed by a gradual increase to a more normal level,” Deputy Governor Jan F. Qvigstad said.

The bank signaled it will move toward higher rates as house prices and consumer debt hover at record levels. Norway, like Switzerland, has struggled to keep its economy balanced as unprecedented monetary easing across the globe distorts assets prices in some of the world’s richest nations. The U.S. Federal Reserve refrained yesterday from reducing its $85 billion in monthly securities purchases, even after earlier signaling it may taper its support of bond markets.

The krone gained as much as 1.1 percent against the euro and was 0.3 percent stronger at 7.8463 as of 11:22 a.m. in the Norwegian capital.

‘Softer Growth’

Norges Bank 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 undermining their inflation targeting. Those efforts paid off last month as underlying inflation surged to 2.5 percent, hitting the target for the first time in four years.

Faster inflation is accompanying a slowdown in growth in the $500 billion economy. Mainland gross domestic product, which excludes oil and gas production, will expand 1.75 percent this year, after growing 3.4 percent in 2012, the bank forecast today. Output by that measure will grow 2.25 percent in 2014, it said. In June, the bank saw growth of 2.5 percent and 2.75 percent this year and next.

`More Pessimistic'

“The krone is weaker, inflation is higher, expected rates abroad are higher so all those things pulled up but Norges Bank had turned much more pessimistic on the growth outlook,” said Erik Bruce, an analyst at Nordea Bank AB in Oslo. “So significant change in its outlook on the economy, that’s the main reason why they didn’t revise up the interest rate forecast more despite very high inflation figures.”

The krone has lost about 6.4 percent against the euro this year, paring some of its gains since 2009. The currency slid on rate warnings from the central bank and after a recovery in the euro area diminished the allure of assets from AAA rated Norway.

The central bank is trying to balance policy to avoid fueling krone gains without overheating an economy buoyed by a booming petroleum industry and house prices that have doubled since 2002. Private debt has surged to about 200 percent of disposable income, according to the central bank.

The bank said today that debt ratios are still high and rising faster than income, according to its report.

“The Executive Board also discussed the moderate growth in private consumption, pointing to many years of strong credit growth which has resulted in a very high level of household indebtedness,” the bank said. “The high debt level is likely to continue to have a damping impact on growth in consumer spending ahead.”

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