Thursday , February 21 2019

Norway firming up plans for first interest rate hike in 7 years


Norway’s central bank is seen firming up plans to lift interest rates “after summer” as the richest Scandinavians leave their oil shock behind them.
As Norway moves from a recovery to an outright expansion, policy makers in Oslo are becoming less focussed on the krone and are preparing to tighten ahead of colleagues in Frankfurt and Stockholm.
“Norges Bank will be forward leaning and send a signal that it won’t be long until rates are coming back up from the very low levels that we’ve had in the past years,” said Marius Gonsholt Hov, a senior economist at Svenska Handelsbanken in Oslo.
Falling unemployment, higher oil prices and an increased optimism among businesses support a tighter policy ahead. The upswing plays into the hands of Governor Oystein Olsen, who has been only a reluctant rate cutter amid concern over a buildup in household debt after years of soaring housing prices.
Policy makers announce their next rate decision and are expected to cement plans to raise rates in September. All 18 economists surveyed by Bloomberg say the bank will keep their key rate at a record low of 0.5 percent, where it has been since March 2016.
Olsen will also be helped by weak krone, which has failed to keep pace with a rally in the price of oil. That’s a boon to Norwegian exporters and also gives Olsen more leeway to tighten ahead of his peers in Frankfurt, Stockholm, and even Zurich. The central bank will consider this as a “relatively weak currency and it won’t be a problem to start raising rates,” said Kyrre Aamdal, senior economist at DNB. “The economy should be able to withstand this.”
But price growth has been stubbornly slow, and has missed the central bank’s estimates in the past months. Even with a lower inflation target of 2 percent, anemic price growth could be the one thing holding policy makers back. Underlying inflation rose only 1.2 percent last month, below the bank’s own 1.6 percent estimate. “The inflation data pulls the rate path downward,” DNB’s Aamdal said.
But the central bank has said that its willing to look past slow price growth as long as the economy is expanding above trend and capacity utilisation is increasing. The bank’s survey of businesses, a preferred gauge of the economy, showed earlier this month that businesses are the most upbeat in six years.
“The bank is forward looking, even though inflation is a bit slower, it will lift the inflation forecast as the economy improves, which is decisive for rate settings,” said Erik Bruce, senior economist at Nordea. On the margin this will lift the bank’s rate path, he said.

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