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Norway Is Set to Raise Rates Again as Oil Wealth Stokes Economy

Norway Is Set to Raise Rates Again as Oil Wealth Stokes Economy

(Bloomberg) --

Norway’s central bank is seen raising interest rates again as a boom in oil investments and steady stimulus from its amassed petroleum wealth allows Scandinavia’s richest economy to diverge from a global economic cooling.

Policy makers in Oslo are on Thursday anticipated to raise their benchmark rate to 1.25%, according to 19 of 21 economists surveyed by Bloomberg. A decision is expected at 10 a.m., followed by a press conference half an hour later.

A move higher would be the third tightening since September. It comes as other central banks are looking to boost stimulus amid increasing economic headwinds.

Forward Guidance

The bank’s forward guidance will be closely watched for how Governor Oystein Olsen and his colleagues strike a balance between a frothy economy at home and the slowdown abroad. As they did in March, they could thread the needle by keeping their tightening outlook for this year but again lower their longer term guidance.

Norway Is Set to Raise Rates Again as Oil Wealth Stokes Economy

Olsen has a enviable problem of overseeing an economy that is also western Europe’s biggest oil producer and is backed by a $1 trillion wealth fund.

Norway’s biggest industry is now at full speed with oil investments seen rising 20% to 184 billion kroner ($21 billion) this year. Unemployment has stabilized below 4% and inflation is running above target. A recent survey of the central bank’s network of businesses showed that their production plans jumped to the highest in almost seven years.

Norway Is Set to Raise Rates Again as Oil Wealth Stokes Economy

The krone has also been surprisingly weak and the government in its latest budget added extra spending, stoking growth further. Olsen said earlier this month that the positive impulse was “information of some magnitude” ahead of the June decision.

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Massive Oil Wealth Primes Norwegian Growth Amid Rising Rates (1)

But there are also doubts, which have kept the krone depressed. A 10 percent swoon in the price of crude since the March meeting is also raising concerns ahead of 2020, when oil investments are predicted to ease again as major projects come online.

Market rates in fact show that traders are reluctant to price in a full quarter-point rate increase by September. Three-month forward-rate agreements maturing in September are now at 1.56%. They settle to the Norwegian interbank offered rate, which is at 1.51%.

Norway Is Set to Raise Rates Again as Oil Wealth Stokes Economy

Here’s what economists say:

Swedbank economist Kjetil Martinsen

“For Norges Bank, solid developments in the domestic economy clearly outweighs global growth moderation and a re-escalation of the Sino-American trade dispute. Risks are elevated and clearly skewed to the downside.”

DNB Markets senior economist Kyrre Aamdal

“We expect Norges Bank to raise policy rates by 25bp at the meeting next week. The rate path is likely to be raised by a few basis points in 2019, we believe, but lowered thereafter. We expect Norges Bank to indicate another rate hike will come within six months.”

Handelsbanken chief economist Kari Due-Andresen

“Despite international turbulence, domestic momentum is solid, in particular due to strong petroleum activities. Consequently, we believe Norges Bank will raise the policy rate in June and bring the next hike forward to this autumn. However, the longer end of the policy rate trajectory should be lowered further, due to increased global risks.”

Nordea senior economist Erik Bruce

“Given Norges Bank’s signals at the May meeting and the development in the economy there is little doubt that Norges Bank will hike key rates to 1.25% in line with the March path. The main question is how the rate path will be. We believe it will be lifted compared to the March path in the short end giving a high probability for a hike again in September and then one or two hikes in 2020. However, longer out it will be lower than the March path.”

SEB chief strategist Erica Blomgren 

“Norges Bank is expected to argue that further rate hikes are needed to avoid acceleration in price and wage inflation. Hence, Norges Bank is likely to deliver on its ‘promise’ by hiking the policy rate to 1.25% at the upcoming June 20 rate decision.”

To contact the reporter on this story: Sveinung Sleire in Oslo at ssleire1@bloomberg.net

To contact the editor responsible for this story: Jonas Bergman at jbergman@bloomberg.net

©2019 Bloomberg L.P.