Deutsche Bank: Norway to Be First to Raise Rates

July 31, 2009

Norges Bank, Oslo.

July 30 (Bloomberg) — Norway’s central bank may be the first among the world’s richest economies to raise interest rates as the global crisis shows signs of abating and inflation overshoots the bank’s target, Deutsche Bank AG said.

“Domestic inflation pressures will be the main reason why Norges Bank will have to be one of the first, if not the first, central bank to hike rates in the industrialized world,” Henrik Gullberg, a strategist at Deutsche Bank AG in London, said in a telephone interview. “The market is pricing in the probability of an initial rate hike at the beginning of next year.”

The world’s fifth-largest oil exporter has fared better through the global slump than most, thanks to continued investments in its petroleum industries, which make up about a quarter of output. Record low borrowing costs and the country’s biggest stimulus package in more than three decades have also helped soften the impact of the global crisis and now risk overheating the economy. “They cannot afford the luxury of other central banks to wait too long,” Gullberg said. “Norges Bank will start to focus on the timing of the tightening cycle before other central banks. The rate path is not really compatible with the actual development we have seen in the Norwegian economy.”

Norges Bank has lowered the benchmark rate seven times from a five-year high of 5.75 percent in September to a record low 1.25 percent in June. Prime Minister Jens Stoltenberg, who faces an election in September, has pledged to push through stimulus measures equivalent to 3 percent of non-oil gross domestic product to support the labor market. “Norway is an exception,” Gullberg said. “They have a lot of ability to stimulate the domestic economy by using the oil wealth and that is what they are doing.” The support measures, designed to jolt the Nordic nation out of its first recession in two decades, have boosted domestic demand, with retail sales up 2.6 percent in May since March. Policy makers pushed through stimulus measures even after inflation overshot the central bank’s 2.5 percent target every month since June last year.