Interest rates held at 2.25 percent

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Norway’s central bank, Norges Bank, has decided to keep interest rates at 2.25 percent in a move widely anticipated before today’s meeting on the issue – although rises are predicted later this year.

Norges Bank's executive board decided to keep rates at 2.25 percent. PHOTO: Norges Bank

The deputy head of the bank, Jan F Qvigstad, told news agency NTB, “we put the rates up in May, keep it at that level with this meeting, and it seems still for us that the rates will increase gradually through the second half of the year.” Explaining today’s decision, he said that “inflation is low” and “looks like keeping itself low for some quarters in the future,” after which it would eventually rise.

Analysts, such as the chief economist at the SpareBank 1 Group Elisabeth Holvik who spoke to newspaper Aftenposten, now believe that Norges Bank’s slightly altered prognosis for future interest rate increases mean that rates will go up “one or two times up to when the next strategy is put forward in October.” This means interest rates could lie at around 3 percent by next spring and at 3.25 percent by next summer, when another increase is predicted. Some, such as Frank Jullum of Fokus Bank speaking to newspaper Dagens Næringsliv, believe that rates could be as high as 4 percent by the end of 2012, with interest rate increases at each of next year’s rate meetings. Holvik disagrees with this analysis, believing that the bank will find it hard to raise rates next year because of the effect this will have on the strength of the kroner and the competitiveness of export industries. In May this year, the rates were increased over 2 percent for the first time since March 2009.

The government’s department of finance has asked Norges Bank to set interest rates in such a way that price inflation is around 2.5 percent, although the bank can decide periodically to prioritize other targets, such as ones related to employment, ahead of the price inflation goal. Price inflation is currently under that target despite the country’s strong economic performance, partly due to relatively moderate wage increases combined with high productivity growth. Bringing the increase in prices back within goal limits is part of the reason why interest rates are currently so low, but analysts like Kyrre Aamdal at bank DnB NOR, who also spoke to Aftenposten, anticipated that strong economic growth would eventually lead to gradually increasing interest rates.

Even after increased interest rates later in the Autumn, household purchasing power is expected to rise this year by around 3.5 percent, according to the Central Statistics Office, after good wage growth. It is also expected to rise in further years.

Views and News from Norway/Aled-Dilwyn Fisher
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