By www.CentralBankNews.info Norway’s central bank held its policy rate steady at 1.5 percent, as expected, and said it would maintain this rate until next summer when it expects to begin raising rates.
Norges Bank (NB), which last cut its rate in March 2012, said it had kept rates unchanged because inflation had been higher than projected, economic growth lower than expected, the krone currency had depreciated and interest rates abroad are low because inflation prospects have been low.
The forecast of a steady rate until the summer of 2014 is in contrast to the central bank’s previous statement from June when it signaled that it was likely to cut rates in the coming year as inflation was taking longer to rise than expected and growth was weaker than expected.
But there are now signs of rising growth in many advanced economies, including the euro area where activity has stopped declining.
“Growth has picked up and interest rate expectations have increased in many advanced countries,” the central bank’s deputy governor, Jan Qvigstad said, adding that output and employment prospects in Norway had weakened slightly but capacity utilisation was expected to remain close to normal while inflation is forecast to be just below the bank’s 2.5 percent target in coming years.
“The analyses imply a key policy rate at today’s level in the period to summer 2014, followed by a gradual increase to a more normal level,” Qvigstad said.
Norway’s headline inflation rate rose to 3.2 percent in August from 3.0 percent in July and Norges Bank estimated underlying inflation between 2.0 and 2.5 percent and projected inflation of around 2.25 percent towards the end of the forecast period, slightly higher than in its previous forecast from June.
Although the central bank signaled in June that it may cut rates this year, economist had already forecast that the bank would move away from cutting rates at today’s meeting due to the higher-than-expected inflation and depreciation of the krone currency.
The central bank also delayed the start of imposing a countercyclical buffer on banks.
In March the bank’s board had decided that banks should start to build up an extra cushion of capital reserves that they could draw on during bad economic times, and the central bank was expected to issue specific advice this month on the level of such a buffer.
“Several years of rising house prices and lending have increased the risk that financial imbalances may trigger or amplify an economic downturn in Norway. House price inflation has slowed but household debt continues to rise faster than income,” the central bank said.
However, the bank also acknowledged that banks are already facing the cost of higher capital ratios and a countercyclical buffer will add further costs.
“Norges Bank expects that the regulation relating to the countercyclical capital buffer will be finalised in the course of the autumn, so that the Bank can give concrete advice in December,” Qvigstad said.