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Oil Wealth Set to Fuel a Second Rate Hike in Norway

Oil Wealth Set to Fuel a Second Rate Hike in Norway

(Bloomberg) -- 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 the 18 economists surveyed by Bloomberg 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 stabilized 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. The Federal Reserve unexpectedly halted a rate hiking cycle in January. Speculation is also growing that Sweden’s Riksbank will need to push back its plans for tightening later this year as growth and inflation slow.

In Norway, Olsen has indicated that he will raise rates gradually and cautiously to assess how debt-laden consumers handle the transition.

Oil Wealth Set to Fuel a Second Rate Hike in Norway

Here’s what economists say

Swedbank economist Marlene Skjellet Granerud and Kjetil Martinsen: 
“As more central banks have either postponed or stopped hiking, could Norges Bank do it all by themselves? We think so. The risk of a runaway krone seems limited, but as the bank will stand out as relatively hawkish, compared to its peers, that is another argument not to increase the pace of hikes.”
Handelsbanken senior economist Marius Gonsholt Hov:
“Norges Bank may slightly increase the already high probability for a September hike, but the next rate hike will not be fully priced in before December, in our view. Further ahead, Norges Bank may lower the rate path slightly on the back of weakening international factors, but the downward revision will probably be minimal.”
DNB senior economist Kyrre Aamdal:
“The experience from the September rate hike indicates that markets and households have handled the rate hike relatively well. Norges Bank may thus continue its process to normalize interest rates, although we still believe it wants to proceed gradually. Therefore, we expect to see that judgment assessments will subtract a few basis points on the rate path in 2019.”

--With assistance from Harumi Ichikura.

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

To contact the editors responsible for this story: Jonas Bergman at jbergman@bloomberg.net, Tasneem Hanfi Brögger

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