Norway Seen Lowering Rate Path as Red-Hot Real Estate Adds Risks

  • Norges Bank seen keeping rates unchanged at record low of 0.5%
  • Bank seen cutting rate path to signal 50% chance of a cut

Norway’s central bank is seen lowering its outlook for its key interest rate in a bid to keep the krone in check while refraining from outright easing amid mounting concerns over the surging property market.

Norges Bank will keep its policy rate at a record low of 0.50 percent on Thursday, according to 20 out of 21 economists surveyed by Bloomberg. The bank will likely signal about a 50 percent chance for a cut next year to avoid the krone from strengthening, according to DNB and Nordea Bank. The currency has risen 7.6 percent on a trade weighted basis this year.

"Most factors normally affecting Norges Bank’s rate decisions indicate a lower rate path and also a rate cut now," said Kyrre Aamdal, a senior economist at DNB. "But a strong rise in house prices and rising household debt increase the risk for financial instability and is a strong argument to keep rates unchanged."

Governor Oystein Olsen is having to strike a balance between a sluggish economy that’s still recovering from the worst drop in crude in a generation and a housing market where prices are surging at an annual pace of more than a 10 percent. Inflation is slowing while rising interest rates abroad are pulling up Norwegian borrowing rates, acting as a break on monetary policy.

The government has supported the economy with record fiscal spending this year and plans to increase withdrawals from its wealth fund also next year to support growth. But with oil spending forecast to decline again in 2017, the economy is having a hard time gaining traction. Mainland economic growth slowed to just 0.2 percent in third quarter, hampered by a slowdown in consumer spending.

“We don’t think they will signal more than a 50 percent chance of another rate cut,” said Kjetil Olsen, chief economist at Nordea in Oslo. “The risk of a real downturn in the economy has been strongly reduced, which means the bank will probably be a little less aggressive in setting rates than before.”

With the oil industry having already lost about 40,000 jobs as a result of the collapse of oil prices two years ago, DNB says plenty of workers have gravitated away from the private sector and toward the public sector and the construction industry, where investments have now surpassed spending in oil.

Still, that could all change again. The krone has surged on the news of a cut in production among OPEC members. Further appreciation could jeopardize the economic recovery and the bank’s inflation target through cheaper imports.

"Should the krone appreciate much then they might simply have to make a decision and let the housing market run," said Aamdal.

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