Norges Bank Delays Tightening by a Year as House Prices Drop

Norway’s central bank left its benchmark interest rate unchanged and said it will delay tightening plans until the summer of 2015, a year later than previously signaled.

The krone sank 0.4 percent against the euro to 8.3987 as of 11:32 a.m. in Oslo. Against the dollar, it dropped 0.4 percent. The bank kept the overnight deposit rate at 1.5 percent, as predicted by 11 of 12 economists in a Bloomberg survey.

“The analyses imply that the key policy rate should be held at the current level in the period to summer 2015 and be increased gradually thereafter,” Deputy Governor Jan F. Qvigstad said. “The increase in the key policy rate is now forecast to occur one year later than projected in September.”

The economy of western Europe’s largest oil exporter is slowing, weighed down by record consumer debt burdens and a deflating housing market. Norway, like Switzerland, has struggled to keep its economy balanced as unprecedented monetary easing across the globe distorts asset prices in some of the world’s richest nations.

Rate Outlook

The bank now sees its rate at 1.5 percent in the first quarter, down from a 1.57 percent forecast in September. It will be 1.5 percent at the end of 2014, compared with 1.74 percent previously. The bank predicts a rate of 1.8 percent by the end of 2015 and 2.31 percent at the end of 2016.

Qvigstad said at a press conference that the bank had considered no other alternatives than to keep rates unchanged.

Norges Bank is pushing back its tightening plans as the housing market shows signs of sinking. Average home prices in Norway have declined 4.4 percent since August after more than doubling over the past decade.

Qvigstad said property prices are likely to continue declining “some more” even as the bank predicts a ‘soft landing.’’

A report this week showed retail sales fell 1 percent in October after a survey revealed that Norwegian business optimism is at its lowest since November 2009, led by deepening pessimism in the construction industry.

The bank today said it expects the mainland economy, which excludes oil and gas production, to expand 2 percent next year and 2.5 percent in 2015. Inflation will average 2 percent through 2016.

Housing Forecasts

Nordea Bank AB, the largest Nordic lender, has forecast that Norwegian housing prices will slide as much as 20 percent over the next two years, forcing the central bank to cut rates twice next year. Norway’s mainland gross domestic product will grow 1.3 percent next year and 1.2 percent in 2015, slowing from a projected 1.8 percent this year, Nordea estimates.

“We stick to our view that Norges Bank will cut rates twice next summer,” said Katrine Boye, an economist at Nordea Bank AB, in a note today. “Norges Bank’s view on the economy is still too optimistic.”

Norges Bank signaled in September it would raise rates in the “summer” next year after successfully fighting off a rally in the krone that was hurting exporters. The currency, which emerged as a haven during the European debt crisis, has slumped 9.5 percent this year on an import-weighted basis. That helped push underlying inflation to the bank’s 2.5 percent target in August for the first time since July 2009. Prices rose 1.9 percent in October.

The krone slid after the bank in June warned it was prepared to ease again to prevent excessive krone strength. The currency also dropped after a recovery in the euro area diminished the allure of assets from AAA rated Norway.

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