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Norway hikes rates to fight overheating from oil bounty
By Pierre-Henry Deshayes
AFP
OSLO
Petroleumworld.com 06 01 06On the back of strong oil prices, Norway's central bank on Wednesday raised interest rates for the fourth time in less than a year in a bid to prevent the country's oil-rich economy from overheating.
The bank raised both its key interest rates by 0.25 percentage points, bringing the sight deposit rate to 2.75 percent and overnight rate to 4.75 percent.
The increase, the fourth since July 2005, will take effect on Thursday, the bank said.
Economists had expected a rate rise, although they had been divided over its timing. Some had forecast a rise Wednesday while others had their sights set on the next central bank meeting scheduled for the end of June.
"The level of activity in the Norwegian economy is high. Employment is rising more rapidly and unemployment has fallen more than projected," said the deputy governor of Norway's Central Bank, Jarle Bergo.
The world's third-largest oil exporter, Norway has benefited from high crude prices, currently hovering around 70 dollars a barrel. State finances have swelled from increased tax revenue from oil and gas production.
In its revised budget published on May 12, the Norwegian government raised its 2006 growth forecast by 0.5 points to 3.0 percent, excluding oil and maritime transport. Norway's central bank forecast a growth rate of 3.5 percent.
Unemployment dropped to 2.9 percent in March, the lowest level for four years, a trend expected to create tensions in the labour market and upward pressure on wages, undermining the competitiveness of Norwegian companies.
As in the rest of the world, high oil prices have hit consumers in Norway who pay some of the world's most inflated petrol prices, a situation compounded by tighter monetary policy and spiralling credit costs prompted by the influx of oil revenue.
Wednesday's decision was in line with the Bank's policy in recent months of "a gradual increase in the rate, in small, not too frequent steps, towards a more normal level."
Further rises should be expected in the coming months, Bergo said.
"We previously forecast a rise of one percentage point for the year, and we are keeping to that," Bergo added. This would mean that rates, which have already risen 0.5 percentage points since the beginning of the year, would rise a further 0.5 points in the second half of the year.
According to ING Financial Markets analyst James Knightley the rate hike momentum could even accelerate.
"With inflationary pressures rising, we believe that 75 basis points of tightening through the rest of this year is more likely than the 50 basis points priced in by markets," he said.
Although on a slight increase, inflation remains well below the country's official target, causing the bank to refrain from raising interest rates more rapidly.
The annual rate stood at 0.8 percent in April, excluding energy and tax, substantially adrift of the bank's 2.5 percent target, which the bank however said would be met in 2009.
AFP 31 1707 GMT 05 06
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