Sunday , July 21 2019

Oil wealth set to fuel second Norway interest rate hike


Norway’s central bank is leaving its closest peers behind. Policy makers in Scandinavia’s richest economy are this week expected to raise interest rates to their highest level in almost four years. The step will mark a second hike since September, helping to cap inflation in western Europe’s biggest oil exporter.
Backed by oil income that pumps massive amounts of stimulus into the economy each year, Governor Oystein Olsen’s situation is worlds apart from that of his colleagues in Frankfurt and Stockholm, where interest rates are stuck below zero. The strength of Norway’s economy is likely to allow Olsen to adhere to a plan for more rate increases in the second half of the year.
“The central bank will more or less stick to the message, keep a degree of flexibility in the rate path, and avoid being perceived as too hawkish,” said Kjetil Ask Olsen, chief economist at Nordea Bank in Norway. All but one of 18 eco-nomists surveyed by Bloom-berg predict a quarter point increase from Norges Bank on Thursday, to 1 percent.
With an oil industry that’s running at full speed again, Norway’s economy is starting to bump up against capacity limits. Unemployment has stabilised below 3 percent and inflation is running above target. Meanwhile, the price of oil soared more than 34 percent since the end of 2018.
Despite the strong economic backdrop, Norway’s krone has remained weak, and is down almost 3 percent since a high last year. That’s given Olsen room to tighten policy without threatening exports. Norges Bank has a stated policy of leaning against the wind, or keeping rates a little higher than warranted, to counter excessive borrowing.
As it breaks away from the pack, Norway’s central bank will probably be keen to strike a note of caution, given the mounting risks to the global economy. The European Central Bank is now adding stimulus and has delayed planned rate increases as the euro area faces its slowest growth since 2013.

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