Norway's Central Bank Raises Benchmark Rate to 4.5%

Norway's Central Bank Raises Benchmark Rate to 4.5%

http://www.bloomberg.com/apps/news?pid=20601085&sid=adgYVrgBy0O8&refer=europe

By Robin Wigglesworth

June 27 (Bloomberg) -- Norway's central bank raised its benchmark interest rate and said rates will be lifted more than previously forecast as widespread labor shortages threaten to boost wage growth and fuel inflation.

The bank increased the deposit rate by a quarter point to 4.5 percent. The rate will average 4.5 percent this year and 5.75 percent in 2008 and 2009, the bank said, lifting a previous forecast by a quarter-point this year and half a point for the next two years. In 2010, the bank sees the rate at 5.5 percent.

High oil prices helped bring down unemployment in Norway, the world's fifth-largest exporter of the commodity, to a European low of 1.7 percent in May. There are now more than twice as many job vacancies as there are unemployed, according to the largest employers' union, and labor shortages will probably worsen as economic growth remains buoyant.

``This will shock the property market,'' said Harald Magnus Andreassen, chief economist at First Securities. ``They have now speeded up their rate forecast by nearly two and a half years'' in total.

The krone appreciated 0.78 percent, the biggest intra-day gain since Jan. 24, to 7.9662 to the euro by 4:30 p.m. in Oslo, the strongest since August 2006.

The bank's new rate forecast ``is clearly more aggressive than expected by the market,'' Erik Bruce, an analyst at Nordea Bank in Oslo, said in an e-mailed note.

Rate Outlook

Norges Bank has raised the benchmark rate 11 times from a record low of 1.75 percent in June 2005 as the economy, excluding shipping and oil, has grown in excess of 4 percent for the past three years. That pushed the International Labor Organization's measure of unemployment to a record low of 2.7 percent in March, and registered unemployment to a 20-year low of 1.7 percent.

The bank signaled two more quarter-point increases will come over the next three rate meetings through Oct. 31, when the next monetary-police report is released.

``We expect the key policy rate to rise further in the period to summer 2008, but this will largely depend on developments in the world economy,'' Norges Bank Governor Svein Gjedrem said in the report. ``Given the inflation target, we will be mindful of the effects of higher interest rates on the krone exchange rate when inflation is low.''

The bank targets underlying inflation of 2.5 percent. Today it forecast inflation would reach that target in 2009 and 2010, rising from 1.5 percent this year.

`Tick, Tick, Boom'

``The Norwegian economy continues to grow at an excessive pace with little, if any, sign of an imminent slowdown,'' said Dominic Bryant, an economist at BNP Paribas, in a report titled ``Norway: Tick, Tick, Boom.'' ``The risk is of a sharp correction further out.''

The economy expanded 1.4 percent in the first quarter of 2007, more than expected. Norges Bank today raised its forecasts for mainland economic growth to 4.25 percent this year and 2.5 percent in 2008.

That would mean four years of growth in excess of 4 percent, in an economy which is already in its longest period of uninterrupted quarterly expansion on record.

Still, the central bank's preferred measure of inflation, excluding the cost of energy and taxes, has held at 1.4 percent for the past two months, as cheap imports from Asia continue to keep down prices.

``It was surprising that Norges Bank expects a higher interest-rate path, despite continued low inflation and forecasts of a more moderate economic growth ahead,'' Tor Steig, chief economist at the Confederation of Norwegian Enterprise, said on the organization's Web site.

Wage growth will accelerate to 5.5 percent this year and next from about 4.3 percent in 2006 as labor shortages mount, the central bank said today. It predicted unemployment to creep up from 2.5 percent this year to 2.75 percent in 2008, 3.25 percent in 2009 and 3.75 percent in 2010.

Falling unemployment has fueled consumer spending. Retail sales growth accelerated to an annual 10.3 percent in April, beating a 27-year high set in March. Annual credit growth has held above 14 percent for over a year due.