Norway to Be First to Raise Rates, Deutsche Bank Says

By Josiane Kremer

July 30 (Bloomberg) -- Norway’s central bank may be the first among the world’s richest economies to raise interest rates as the global crisis shows signs of abating and inflation overshoots the bank’s target, Deutsche Bank AG said.

“Domestic inflation pressures will be the main reason why Norges Bank will have to be one of the first, if not the first, central bank to hike rates in the industrialized world,” Henrik Gullberg, a strategist at Deutsche Bank AG in London, said in a telephone interview. “The market is pricing in the probability of an initial rate hike at the beginning of next year.”

The world’s fifth-largest oil exporter has fared better through the global slump than most, thanks to continued investments in its petroleum industries, which make up about a quarter of output. Record low borrowing costs and the country’s biggest stimulus package in more than three decades have also helped soften the impact of the global crisis and now risk overheating the economy.

“They cannot afford the luxury of other central banks to wait too long,” Gullberg said. “Norges Bank will start to focus on the timing of the tightening cycle before other central banks. The rate path is not really compatible with the actual development we have seen in the Norwegian economy.”

The krone gained 0.4 percent against the euro to trade at 8.7524 as of 9:28 a.m. in Oslo. Against the dollar, the krone gained 0.5 percent to trade at 6.2212.

Svein Gjedrem, governor of Norges Bank, would overtake Mervyn King at the Bank of England, as well as Ben S. Bernanke at the U.S. Federal Reserve and Jean-Claude Trichet at the European Central Bank in reversing a spate of rate cuts.

September Election

Gjedrem has lowered the benchmark rate seven times from a five-year high of 5.75 percent in September to a record low 1.25 percent in June. Prime Minister Jens Stoltenberg, who faces an election in September, has pledged to push through stimulus measures equivalent to 3 percent of non-oil gross domestic product to support the labor market.

“Norway is an exception,” Gullberg said. “They have a lot of ability to stimulate the domestic economy by using the oil wealth and that is what they are doing.”

The support measures, designed to jolt the Nordic nation out of its first recession in two decades, have boosted domestic demand, with retail sales up 2.6 percent in May since March. Policy makers pushed through stimulus measures even after inflation overshot the central bank’s 2.5 percent target every month since June last year.

Underlying inflation, which strips out the impact of taxes and energy, accelerated to an annual 3.3 percent in June, the fastest pace in eight months.

Krone Losses

Prices have also gained after the krone lost 17 percent against the dollar in the past year and about 8 percent against the euro. The krone, the third-worst performer against the euro since the end of June 2008, may return more in the next year against the euro than all 48 other foreign-exchange trades tracked by global investment banks, according to median predictions in Bloomberg surveys.

Norwegian home owners, the second richest in the world, have floating rates on home loans, meaning lower central bank rates are quick to feed through to mortgage costs. At the same time, job security is high, with about a third of the labor force employed in the public sector. Residential property values rose 5.3 percent in the three months ended June from the first quarter, the second consecutive quarterly gain.

Finance Minister Kristin Halvorsen has warned consumers against embarking on spending sprees. “I fear that maybe some of the consumers will invest in the housing market” on the assumption that “the interest rate will be at a very low level for many years ahead,” Halvorsen said in a June 22 interview.

Outperformer

Norway, the only Scandinavian country outside the European Union, will suffer a milder recession than Sweden, Finland and Denmark as well as the euro region. The mainland economy, which excludes oil and shipping, will shrink 1.5 percent this year and grow 0.9 percent next year, according to the Organization for Economic Cooperation and Development. That compares with a 4.8 percent slump in the 16-member euro area this year and no growth for the region in 2010.

Norway’s jobless rate was 2.7 percent in June, down from this year’s high of 2.8 percent in April, the Oslo-based Labor and Welfare Organization said on July 2.

Norges Bank “will start hiking much earlier than all the others because clearly Norway is outperforming all the other advanced economies,” said BNP Paribas economist Gizem Kara. Though she says Norway will lead the way in monetary tightening, the forecast is based on a delayed global recovery, meaning the first increase won’t be until the beginning of 2011.

‘Dare to Raise’

The Fed will start raising its overnight bank lending rate from 0.25 percent in the third quarter next year, according to the median in a July 10 Bloomberg survey of 53 economists. The European Central Bank will increase borrowing costs from 1 percent in the fourth quarter next year, a June 26 survey of 40 economists showed.

“It will be interesting to see if Norges Bank dares to increase its interest rate before the rest of the world starts to hike,” said Katrine Boye, an economist at Nordea Bank AB in Oslo. “If they don’t make these increases, the economy could eventually overheat.”

To contact the reporter on this story: Josiane Kremer in Oslo at Jkremer4@bloomberg.net.