Norway Should Mull Higher Rates to Quell Overheating, OECD Says

By Tasneem Brogger

Aug. 20 (Bloomberg) -- Norway should consider raising interest rates further as the economy of the fifth-largest oil exporter risks overheating and inflation pressures mount, the Organization for Economic Cooperation and Development said.

``The continuing strength of the economy in early 2008 is certainly a reminder that the danger of overheating will not recede immediately and interest rates may need to go higher,'' the Paris-based OECD said in an e-mailed report released today.

Norway's central bank raised the key rate in June and indicated at the time it may lift it once more by a quarter point this year to 6 percent to prevent inflation from becoming entrenched. Policy makers will likely raise the key rate next month, according to UBS Ltd., after underlying inflation rose to a seven-and-a-half year high of 2.9 percent in July.

``In view of ongoing inflationary pressures, it is too early to say whether monetary policy has been successful in stabilising inflation close to the target,'' the OECD said.

Norges Bank targets price gains of 2.5 percent ``over time.'' Policy makers opted to leave the key rate at 5.75 percent at their Aug. 13 meeting. The bank next meets to discuss rates on Sept. 24.

The mainland economy will grow 3.25 percent this year, compared with 6.2 percent in 2007, the central bank forecast on June 25. At the same time, inflation adjusted for taxes and energy will accelerate to 2.5 percent from 1.4 percent in 2007, the bank estimates.

``Despite slowing demand, the output gap will not be closed for some time,'' the OECD said. ``It is likely that inflationary pressures will continue for some time.''

To contact the reporters on this story: Tasneem Brogger in Copenhagen at tbrogger@bloomberg.net;