Stronger case for Norway to raise rates

OSLO: The case is strengthening for Norwegian central bank policymakers to soon raise interest rates for the first time in seven years.

Economic growth is accelerating, oil prices are up, unemployment is nearing rock-bottom levels and central banks around the world are starting to withdraw stimulus.

At the same time, the government this month decided to lower the inflation target, opening for a faster tightening of policy in the short run.

This will likely prompt policymakers in Oslo to signal an earlier rate increase than the current December forecast when they reveal their next rate decision tomorrow.

All 24 economists surveyed by Bloomberg say the bank will keep the benchmark rate at a record low of 0.5%, where it has been since March 2016.

“It’s more likely that rates will be hiked before December than after,” said Kjersti Haugland, chief economist at DNB ASA, Norway’s biggest bank. “We see a fifty-fifty probability that the rate path this time will indicate a hike already in September.”

The view was shared by SEB AB chief strategist Erica Blomgren, who said the bank would “signal with 100% certainty that a rate hike will occur in 2018 and are tilting toward a September lift-off.”

Boosted by record fiscal and monetary stimulus, Norway’s economy has survived a crash in its oil industry. The government on Monday revised down unemployment forecasts while predicting stronger exports and a revival in oil investments.

The upswing plays into the hands of governor Oystein Olsen, who has only been a reluctant rate cutter amid concern over a buildup in consumer debt after years of soaring housing prices.

But even with a lower inflation target of 2% now, anemic price growth could be the one thing holding policymakers back. Underlying inflation was at just 1.4% last month, below the bank’s own 1.7% estimate.

After soaring during the downturn as more than 50,000 oil jobs were lost, registered unemployment has now slid to 2.5% and the US$400bil economy is adding jobs at a fast clip. The latest central bank’s regional network survey revealed that labour supply constraints are now starting to weigh on production.

The Norwegian krone is still weak after hitting a near record low against the euro at the end of last year. Investors sold off the currency amid a correction in housing prices. Housing prices have since stabilised, backing the central bank’s view that the market is heading for a soft landing.

“Even if we see strengthening in the krone, it’s a long way down to levels where it will be troublesome for Norwegian industries,” DNB’s Haugland said.

The regional network survey has proved to be a good proxy of economic growth. The most recent report published earlier this month showed that companies are the most upbeat on production since the end of 2012.

But all eyes will be on how Norges Bank interprets its new inflation target.

“This must somehow be addressed,” said Haugland. “We don’t think it will have an impact on the rate path, but there’s a risk of a lift in the near term.”