2017.09.2210:25:00UTC+00Norges Bank Unlikely To Hike Rates In Near Future: Capital Economics

Norway's interest rate increases seem very far with inflation likely to remain below the central bank's target in the medium term and a cooling housing market environment, Jack Allen, an economist at Capital Economics, said.

Norges Bank retained its key policy rate at 0.50 percent in a unanimous vote on September 21 and hinted that the rate will remain at current level in the period ahead.

Looking ahead, the bank sees the risks to its forecast that annual mainland GDP growth will remain around 2 percent over the next few years as balanced.

The latest survey indicators suggest that growth will pick up, but slower growth in housing market activity will weigh on housing investment.

Meanwhile, continued weak wage growth and the recent rise in the Krone exchange rate forced bank to push its inflation forecast in 2018 down slightly.

But, the bank nudged up its forecast for inflation by the end of 2019, nonetheless well below the 2.5 percent target.

Based on this given aspects, the Norges Bank increased its interest rate forecast slightly, implying that it will begin tightening monetary policy mid-way through 2019, the economist said.

By contrast, Capital Economics expects that the bank will wait until 2020.

"Meanwhile, significant risks remain in the housing market," Allen pointed out.

House price inflation has slowed even more sharply than the Norges Bank anticipated, after macro-prudential regulations were implemented in January to tackle the risk of a bubble.

"To be clear, we don't expect a crash in the housing market, as the fundamental forces that have pushed house prices up are likely to remain in place," Allen said.

"...But there is clearly a risk that things turn out worse than expected."

That would cause the economic recovery to slow, and so warrant lower interest rates, the economist added.

Capital Economics has penciled in the first hikes for 2020, much later than the consensus forecast, Allen said.