OSLO – The head of Norway's central bank said it would likely follow in the footsteps of the U.S. Federal Reserve and increase its key interest rate toward the end of 2018, despite muted inflation and a cooling in the Norwegian housing market.
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The Federal Reserve has raised its key rate five times since the end of 2015, and last week signaled it will continue on that tightening path in 2018. But so far it has had few fellow travelers in Europe, with only the Czech National Bank and the Bank of England having raised their key rates.
Speaking in an interview with The Wall Street Journal, Øystein Olsen said that "an overall improvement in the outlook for the Norwegian economy" and better growth among Norway's main trading partners would facilitate a rate rise.
"Given the picture and the outlook for inflation, you could expect an interest-rate increase toward the end of the year," Mr. Olsen said.
Norway's energy-dependent economy is recovering from an earlier slump in oil prices, which hit Europe's largest energy exporter hard and depressed growth in the $400 billion economy. The mainland economy--which excludes oil and gas production--is forecast to grow by 1.9% this year, after 1% growth in 2016, Norges Bank estimates.
Mr. Olsen said that it would be "reasonable" to expect that any future rate increases would occur in steps of a quarter of a percentage point, dampening speculation among some economists that Norway's central bank could take smaller steps.
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If Norges Bank were to raise its key rate next year, it would likely do so ahead of the European Central Bank, since most economists don't expect the ECB to lift its benchmark rate before fall 2019.
ECB President Mario Draghi said last week that interest rates in the eurozone will remain unchanged for "an extended period," pointing to "somewhat muted" inflation.
Surprisingly soft inflation and a volatile national currency have also kept the Norges Bank sidelined in recent months, but Mr. Olsen said inflation should pick in the course of next year and beyond, led by rising wages.
The weakening of the krone since the start of this year has also contributed to a stronger inflation outlook, he said. A softer currency can push prices of imported goods and services higher.
Nevertheless, inflation in Norway will probably remain "somewhat below" the 2.5% target in the next two to three years, Mr. Olsen said.
Mr. Olsen rejected talk that Norway's housing market could be headed for a crash, but said that there are risks to the Norges Bank's outlook for "a soft landing" with regard to prices and construction investments.
Following years of rapid increases, house prices in Norway have started to decline. Since reaching a peak in spring 2017, prices have fallen in most months, especially in Oslo, where prices had risen by more than 20% in late 2016 compared with late 2015.
"If housing prices continue to fall more markedly than we have assessed, that will definitely affect our forecast," Mr. Olsen said.
The Organization for Economic Cooperation and Development warned in November the turnaround in house prices and its potential impact on the financial sector and the wider economy "is the chief financial vulnerability" in Norway.
"As soft landings in housing and credit markets are rare, there are no grounds for complacency," the OECD said.
Write to Nina Adam at firstname.lastname@example.org
(END) Dow Jones Newswires
December 18, 2017 09:47 ET (14:47 GMT)