Norway's central bank left its benchmark interest rate unchanged as a slowdown in economic growth tempered policy makers' concern that inflation is set to accelerate.
Norges Bank held the deposit rate at 5.5 percent, according to a statement on the bank's Web site, after lifting it by 2 percentage points since the beginning of 2007. Unchanged rates were forecast by all 18 economist surveyed by Bloomberg.
The economy grew at its slowest pace in more than four years in the first quarter as interest rates at a five-year high and a mounting labor shortage crimped demand and production. The central bank has signaled it may lift its benchmark rate by another quarter point this year to prevent rising wages from pushing the inflation rate above the 2.5 percent target.
"Eventually the need to fight inflation will take the upper hand versus the need to sustain growth,'' Davide Stroppa, an economist at UniCredit Markets & Investment Banking, wrote in a note. A statement by the central bank today is quite explicit in recognizing the need of further tightening on the back of higher than envisaged inflation.
The krone jumped as much as 0.3 percent to 7.8494 per euro, before trading at 7.8692 by 4:28 p.m. in Oslo. The yield of Norway's 6 percent note maturing May 2011 gained 3 basis points to 5.15 percent.
Further Increase
"Underlying inflation is now somewhat higher than 2.5 percent,'' Norges Bank Governor Svein Gjedrem said in the statement. "The increase in inflation and the prospects of higher inflation suggest a further increase in the key policy rate.''
Growth in the mainland economy, which excludes oil and shipping, waned to 0.2 percent in the first three months of 2008, slower than expected by economists, yet adjusted for tax distortions and electricity production, in line with the central bank's expectations, according to Gjedrem.
Higher funding costs in money markets are also aiding Norges Bank's attempts to slow growth and ease pressure in the labor market. The three-month Norwegian interbank rate touched a six- year high of 6.52 percent on May 19, which is spilling over to consumers as higher mortgage costs.
The economy expanded 6 percent last year, the fastest pace since 1971, while underlying inflation, excluding tax changes and electricity, quickened to a five-year high of 2.4 percent in April.
Exceptionally Demanding
"Rate setting will be exceptionally demanding in the months to come, with significant inflationary pressures weighed against slower growth,'' Svenska Handelsbanken AB chief Norwegian economist Knut Anton Mork wrote in a client note. Handelsbanken now forecasts two quarter point rate increases from Norges Bank this year, up from a previous forecast of one rate increase.
UniCredit SpA have also revised their forecast to predict a rate increase to 5.75 percent, with the June 25 meeting the preferred option, Stroppa said.
The central bank has forecast that rates will peak at 5.63 percent in the third quarter, indicating a 50 percent chance of a quarter point increase.
Citigroup and Nordesa Bank AB, Scandinavia's biggest bank, revised up their rate forecasts ahead of the meeting, to a peak of 5.75 percent and 6 percent respectively.
Norway's unemployment rate has held at a record low of 2.4 percent for four months running, pushing up wages as companies compete for workers. Supported by soaring oil prices, Norway's OBX stock index, dominated by petroleum companies, has recovered losses from the first quarter to touch a record on May 22.
"With an economy characterized by continued strong growth, albeit slowing, and accelerating domestic inflation risks, it is difficult to foresee changes in the picture large enough to prevent the bank from continuing tightening monetary policy,'' Tina Mortensen, an economist at Citigroup Inc., said in a client note.
Norges Bank held the deposit rate at 5.5 percent, according to a statement on the bank's Web site, after lifting it by 2 percentage points since the beginning of 2007. Unchanged rates were forecast by all 18 economist surveyed by Bloomberg.
The economy grew at its slowest pace in more than four years in the first quarter as interest rates at a five-year high and a mounting labor shortage crimped demand and production. The central bank has signaled it may lift its benchmark rate by another quarter point this year to prevent rising wages from pushing the inflation rate above the 2.5 percent target.
"Eventually the need to fight inflation will take the upper hand versus the need to sustain growth,'' Davide Stroppa, an economist at UniCredit Markets & Investment Banking, wrote in a note. A statement by the central bank today is quite explicit in recognizing the need of further tightening on the back of higher than envisaged inflation.
The krone jumped as much as 0.3 percent to 7.8494 per euro, before trading at 7.8692 by 4:28 p.m. in Oslo. The yield of Norway's 6 percent note maturing May 2011 gained 3 basis points to 5.15 percent.
Further Increase
"Underlying inflation is now somewhat higher than 2.5 percent,'' Norges Bank Governor Svein Gjedrem said in the statement. "The increase in inflation and the prospects of higher inflation suggest a further increase in the key policy rate.''
Growth in the mainland economy, which excludes oil and shipping, waned to 0.2 percent in the first three months of 2008, slower than expected by economists, yet adjusted for tax distortions and electricity production, in line with the central bank's expectations, according to Gjedrem.
Higher funding costs in money markets are also aiding Norges Bank's attempts to slow growth and ease pressure in the labor market. The three-month Norwegian interbank rate touched a six- year high of 6.52 percent on May 19, which is spilling over to consumers as higher mortgage costs.
The economy expanded 6 percent last year, the fastest pace since 1971, while underlying inflation, excluding tax changes and electricity, quickened to a five-year high of 2.4 percent in April.
Exceptionally Demanding
"Rate setting will be exceptionally demanding in the months to come, with significant inflationary pressures weighed against slower growth,'' Svenska Handelsbanken AB chief Norwegian economist Knut Anton Mork wrote in a client note. Handelsbanken now forecasts two quarter point rate increases from Norges Bank this year, up from a previous forecast of one rate increase.
UniCredit SpA have also revised their forecast to predict a rate increase to 5.75 percent, with the June 25 meeting the preferred option, Stroppa said.
The central bank has forecast that rates will peak at 5.63 percent in the third quarter, indicating a 50 percent chance of a quarter point increase.
Citigroup and Nordesa Bank AB, Scandinavia's biggest bank, revised up their rate forecasts ahead of the meeting, to a peak of 5.75 percent and 6 percent respectively.
Norway's unemployment rate has held at a record low of 2.4 percent for four months running, pushing up wages as companies compete for workers. Supported by soaring oil prices, Norway's OBX stock index, dominated by petroleum companies, has recovered losses from the first quarter to touch a record on May 22.
"With an economy characterized by continued strong growth, albeit slowing, and accelerating domestic inflation risks, it is difficult to foresee changes in the picture large enough to prevent the bank from continuing tightening monetary policy,'' Tina Mortensen, an economist at Citigroup Inc., said in a client note.
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I cannot believe bank CD'S in the united states are now below 1%. The banksters really do have the world over a barrel.
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