(Bloomberg) -- Norway’s central bank signaled it may start raising interest rates earlier than indicated in the past, after a slump in the krone provided a path out of years of stimulus.
Policy makers now see a first increase at the end of next year, Governor Oystein Olsen said Thursday in Oslo after keeping the benchmark deposit rate at a record low of 0.5 percent for an 11th meeting. The krone climbed more than 1 percent against the euro after the announcement.
With “improved prospects” for the Norwegian economy and “inflation moving toward the target,” we now expect “to have a slightly earlier first increase,” Olsen said in an interview after a press conference.
Currency traders have made life easier for the bank, driving the krone down more than 6 percent since August amid concerns Norway’s housing market faces a price correction. A weaker currency pushes up import prices, making it more likely the central bank will get closer to its 2.5 percent inflation target. Underlying price growth was 1 percent in November.
Olsen said it was hard to explain the decline in the krone, saying the bank now expects it to reverse some of its recent losses. He predicts a “soft landing” for the housing market.
It’s the second consecutive meeting at which Norges Bank has brought forward the timing of rate increases. In June, policy makers abandoned any mention of further easing thanks to Norway’s rebound from the 2014 oil crisis and as other central banks prepare to unwind stimulus programs.
The bank painted an upbeat picture of the economy, anticipating mainland growth of 2.3 percent next year and registered unemployment falling to 2.4 percent. Inflation will accelerate to 2.1 percent in 2020, when wage gains will reach 4 percent. It also predicted oil investments will rise next year as western Europe’s biggest crude producer recovers from the oil crash.
But judging from the surge in the currency, the bank could find it hard to press up rates too much ahead of others. Analysts at DNB ASA, and Svenska Handelsbanken AB on Thursday said the bank is too optimistic on inflation and wages. DNB expects that a first rate increase won’t come until September 2019 while Handelsbanken sees three years until any tightening. Nordea Bank sees a first increase in the summer of 2019.
Norway’s retreat from extreme stimulus comes as the world’s major central banks look set to embark on potentially the biggest tightening phase in more than a decade. This U.S. Federal Reserve on Wednesday raised rates. The European Central Bank is due to announce its latest rate decision later on Thursday.
Olsen said it may be “too early” to characterize 2018 as a year of tightening. “Given the picture we now present we will have very low interest rates still internationally, and also in Norway,” he said.
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