Norway Combats Surging Housing Market Risks as Easing Seen Done

  • Government raises countercyclical buffer for banks to 2%
  • Norges Bank still leaves small bias for interest rate cut

Olsen: Inflation Expectations Seem Well Anchored

Norway’s central bank kept its benchmark unchanged and unexpectedly held off on lowering its rate outlook amid growing concerns over imbalances building up in the nation’s red-hot housing market. The krone jumped.

Oeystein Olsen on Dec. 15.

Photographer: Fredrik Bjerknes/Bloomberg

The deposit rate was held at 0.50 percent, as forecast by 21 of 22 analysts surveyed by Bloomberg, Norges Bank said in Oslo Thursday. It kept its outlook for rates bottoming at 0.4 percent. Analysts had expected it to lower the so-called path, in part because of the strengthening krone.

“Financial imbalances have been building up for quite some time related to the high growth of debt in the household sector and accelerating housing prices,” Governor Oystein Olsen said in an interview after a press conference. “That trend has continued recently, and forms part of the background for our decision on the interest rate.” 

Norges Bank Governor Olsen Talks With Bloomberg


The decision signals a growing unease with the surging housing market and potential financial imbalances. On the recommendation of the bank, the government also on Thursday decided to raise the countercyclical capital buffer for banks to 2 percent by 2018. It comes just a day after the government introduced tighter lending standards in the capital Oslo, where housing prices are surging at an annual pace of more than a 20 percent.

The central bank’s easing bias is now “no longer credible,” Gaute Marius Langeland, an analyst at Nordea Bank, said in a note.

“The significant news today is that Norges Bank is raising the rate path despite news flow strictly speaking being on the downside,” he said. “This is a clear signal that the bank is very concerned by the developments in the housing market.”

The krone rose 0.5 percent to 8.98 per euro as of 12:01 p.m. in Oslo.

While battered by a collapse in oil prices since 2014, Norway has managed to avoid negative rates and the kind of unconventional policies that dominate elsewhere. As the economy of western Europe’s largest oil producer now spies a recovery from the crude slump, the central bank is also forced to contend with an appreciating currency.

The rate will remain unchanged in “the period ahead," Olsen repeated on Thursday. The bank is keeping rates unchanged even as it sees a slower economic recovery than earlier and inflation sliding to 1.7 percent over the next two years, below its 2.5 percent target.

Olsen defended the bank’s move away from strict inflation targeting.

“Given the overall picture of our economy we characterize that as close to the target,” he said. “And inflation expectations seem well anchored and that allows us to have a conduct of monetary policy which we characterize as flexible, taking other considerations into account.” 

The krone has risen about 3.7 percent on a trade-weighted basis in the past six months, hurting exporters and driving down inflation. Brent crude, meanwhile, is up 10 percent over the same time frame, boosted by an agreement by oil producing nations to cut production.

Even so, the Federal Reserve’s rate increase on Wednesday will ease pressure on the Norwegian bank after the krone slid as much as 1.8 percent against the dollar.

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