Interest rates moving up

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Norges Bank raised its key lending rate for the first time in five months on Wednesday, in an effort to keep inflation and economic growth under control. Bank board boss Svein Gjedrem said recent trends can bring rates back up to a “more normal” level.

Central bank chief Svein Gjedrem faces a dilemma over interest rates. PHOTO: Norges Bank

Norwegian interest rates, like those elsewhere in the world, have been extraordinarily low and stayed low after the global finance crisis took hold. Norges Bank had kept its key lending rate (styringsrenten) at 1.75 percent, but boosted it by a quarter-point, to 2 percent, at an executive board meeting on Wednesday.

“Inflation has moved in line with projections and growth in the Norwegian economy appears to have picked up as anticipated,” Gjedrem said in a statement from the central bank. “This suggests that the interest rate should be raised further towards a more normal level.”

Gjedrem and his colleagues face an ongoing dilemma over interest rates. Norwegians keep spending money and driving up housing prices, for example, to record levels, and Gjedrem needs to keep the oil-fueled economy from overheating. That strengthens arguments for raising rates, to discourage heavy borrowing.

At the same time, however, Norway’s currency (the krone) remains very strong and can get stronger if rates go up. That in turn can make Norwegian products and services even more expensive than they already are, compared to other countries, and hurt exports. So Norges Bank has resisted interest rate hikes in the past several months.

Now, however, the bank said the global economy is “rebounding” and oil prices and other commodity prices have increased. “As the activity level increases and the effects of the krone appreciation unwind, inflation is expected to move up again,” Gjedrem said.

Government securities markets, however, remain “turbulent” even though a loan deal was agreed between Greece, EU countries and the International Monetary Fund. Gjedrem conceded that that bank board “considered the alternative of leaving the key policy rate unchanged,” noting that developments in Europe “may prove to be weaker than expected, which may also affect the outlook for the Norwegian economy.”

Nordic banking group Nordea, meanwhile, reported this week that it thinks the debt crises in Europe will keep rates low for several more years. Katrine Boye, a senior analyst for Nordea Markets, told newspaper Dagens Næringsliv (DN) that rates likely will say under 4 percent for the next four to five years.

She did successfully predict, however, that Norges Bank would raise rates on Wednesday, and thinks it will “carefully” raise rates up to about 3.25 percent over the next two years.

Views and News from Norway/Nina Berglund
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