Norwegian Krone Falls as Central Bank Leaves Key Rate on Hold

By Bo Nielsen

Sept. 24 (Bloomberg) -- The Norwegian krone weakened against the euro after the central bank kept its main interest rate at a 5 1/2-year high and said there are ``clear signs'' economic growth is slowing.

While inflation has risen above the central bank's 2.5 percent target, the risks of an economic downturn prevented an increase in borrowing costs, the bank said today.

``In Norway, there are also clear signs that economic growth is slowing,'' Deputy Governor Jan Qvigstad wrote in a statement on the bank's Web site. ``There is now an unusually high degree of uncertainty linked to the turbulence in financial markets. It is therefore appropriate to keep the interest rate unchanged now.''

The Norwegian currency was at 8.2542 per euro on 2:05 p.m. in Oslo from 8.2274 yesterday. It was little changed at 5.6211 versus the dollar, from 5.5411. Sweden's krona was little changed at 9.6357 per euro and 6.5625 versus the dollar.

UBS AG and Citigroup Inc. were among the banks in the past week that altered their forecasts to unchanged, from an earlier estimate of a quarter-point increase, as inflation slowed.

Norway's underlying inflation rate, which excludes energy costs and taxes, fell to 2.8 percent in August, from 2.9 percent in July, Oslo-based Statistics Norway said on Sept. 10. Norges Bank's inflation target is 2.5 percent.

``The risk of a long economic downturn abroad has increased,'' the bank said in today's statement.

Norges Bank, which raised its key rate twice this year, to a 5 1/2-year high, indicated in June it may deliver one more increase by December to curb inflation.

High-Yield Demand

Demand for higher-yielding currencies also rose after the Federal Reserve arranged to channel $30 billion into the global financial system by opening currency swap lines with Australia, Denmark, Norway and Sweden, and Goldman Sachs Group Inc. said it will raise $5 billion from Warren Buffett's Berkshire Hathaway Inc. in a plan to shore up the firm's capital base and restore market confidence.

Buffett's investment in Goldman alleviated concern that firms reliant on bond markets for funding will be starved of finance following a surge in borrowing costs. Money-market rates soared after Lehman Brothers Holdings Inc. filed for bankruptcy last week and Bank of America Corp. bought Merrill Lynch & Co.

When risk aversion is lower, investors borrow in low- yielding currencies such as the yen to buy assets in higher- interest-rate assets such as the krone, in so-called carry trades. When risk aversion increases the trades are reversed.

Changed Forecasts

Sweden's interest rate of 4.75 percent and Norway's main rate of 5.75 percent are exceeded only by New Zealand and Australia among the Group of 10 nations.

In other trading, the Icelandic krona traded at 94.85 versus the dollar, from 94.94 yesterday, after a government report showed the consumer-price index rose 14 percent in the year ended in September, down from 14.5 in the prior period.

Nordic government bonds climbed, with the yield on Sweden's 5.25 percent note due March 2011 falling 9 basis points to 3.92 percent. The yield on Norway's 6 percent bond maturing in May 2011 fell 2 basis points to 4.86 percent, according to Danske Bank A/S prices. Yields move inversely to bond prices.

To contact the reporter on this story: Bo Nielsen in Copenhagen at bnielsen4@bloomberg.net