Norges Bank May Leave Main Rate on Hold as Recession Abates

By Josiane Kremer

Aug. 11 (Bloomberg) -- Norway’s central bank may leave its benchmark interest rate at a record low this week as the country’s first recession in two decades shows signs of abating, a survey showed.

Oslo-based Norges Bank will keep the overnight deposit rate at 1.25 percent, ending an easing cycle that started in October, according to all 12 economists surveyed by Bloomberg. The bank announces its decision tomorrow at 2 p.m. local time.

Norway’s oil wealth has helped shield the country from the worst of the global recession, thanks to continued investment in its petroleum industries, which make up about a quarter of output. Norges Bank has kept rates higher than in neighboring Sweden and the euro area and will probably be the first central bank in the industrialized world to start raising borrowing costs, Deutsche Bank AG strategist Henrik Gullberg said in July.

“The bank will most likely conclude that the news has been on the strong side when it sums up developments” since June, said Erik Bruce, an economist at Nordea Bank AB in Oslo. “But it will be careful not to sound too hawkish.”

Policy makers will need to weigh the prospect of economic recovery against slowing price growth. Inflation numbers are “heading downward,” said Harald Magnus Andreassen, chief economist at First Securities ASA in Oslo. Norges Bank expects inflation in the world’s fifth-biggest oil exporter to slow “to close” to 1.5 percent in the coming year, it said on June 17.

Inflation adjusting for the effect of taxes and energy last month slowed to within the central bank’s target for the first time since June 2008. The rate dropped to an annual 2.5 percent, the central bank’s target rate, from 3.3 percent in June, Statistics Norway said yesterday.

Outlook

The mainland economy, which excludes oil and shipping, will shrink 1.5 percent this year and grow 0.9 percent next year, the Organization for Economic Cooperation and Development said in June. That compares with an estimated 4.8 percent slump in the 16-member euro area this year and no growth for the region in 2010, according to the OECD. Norway is the only Scandinavian country outside the European Union.

Governor Svein Gjedrem has lowered the benchmark rate from a five-year high of 5.75 percent in September. 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.

Government and central bank support measures have boosted domestic demand and fueled house prices, which jumped 5.3 percent in the second quarter. Retail sales rose 1.9 percent in May from April, marking the second consecutive rise this year.

‘Surprised Positively’

Joblessness stood at 3 percent in July, measured according to the number of people receiving jobless benefits, and has risen less than Norges Bank expected, the bank said in June.

Norges Bank “will have been surprised positively since the last meeting, on 17 June, by the labor and financial markets especially,” Bjorn-Erik Rohne Orskaug, an Oslo-based economist at DnB NOR ASA, Norway’s biggest bank, said in a note to clients.

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.

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.

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