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7 months ago
UPDATE 2-Norway keeps rates on hold, worries over house price boom
December 15, 2016 / 9:30 AM / 7 months ago

UPDATE 2-Norway keeps rates on hold, worries over house price boom

4 Min Read

* Central bank keeps main rate at 0.50 pct

* Says rate likely to remain at today's level in the years ahead

* Still sees higher probability of a cut than a hike

* Government imposes tougher capital requirement on banks (Adds quotes, tighter capital requirement for banks)

By Camilla Knudsen

OSLO, Dec 15 (Reuters) - Norway's central bank kept its key interest steady at 0.5 percent on Thursday and said the cost of borrowing will probably remain at this level in the years ahead, although it warned that a boom in house prices could hurt the economy in the long run.

Rising housing prices and worries over household debt levels are among the main reasons why the central bank is cautious about further easing, despite lower-than-expected inflation, low economic growth and higher unemployment amid weak oil prices.

"Our current assessment of the outlook suggests that the key policy rate will most likely remain at today's level in the period ahead," Norges Bank Governor Oeystein Olsen said.

However, the bank kept an easing bias from September as it said there was a slightly higher probability of a rate decrease than an increase in the year ahead.

"Norges Bank kept a rate path with an easing bias, but lifted it in the front and in the back end," brokerage Nordea Markets said.

"This reflects a central bank concerned about accelerating house prices and financial stability and cements the impression of reluctance to cut rates," it added.

All but one of the 16 economists polled by Reuters expected an unchanged deposit rate at the current record-low.

Rapidly Rising Housing Prices

The central bank has reduced its cost of borrowing from 1.5 percent in late-2014 in a bid to balance the requirements of an economy that has slowed as oil prices plunged with the need to prevent an already red-hot property market from overheating.

"The rapid rise in house prices and household debt has increased the risk of a sharp fall in demand further out," said the central bank.

"A lower key policy rate increases the risk of a further acceleration in house price inflation and debt accumulation".

House prices rose roughly 12 percent this year, driving up the consumer debt-to-income ratio and feeding fears that the economy may suffer longer term.

Norway's household debt to income stood at 222 percent in 2015, according to OECD data, among the highest in Europe.

"Norges Bank is afraid, very afraid, of financial imbalances," Sparebanken Vest chief economist Joergen Gudmundsson said.

To help reign in housing prices and household debt, the Finance Ministry said in a statement it would raise capital buffer requirements for banks to 2.0 percent from 1.5 percent, following the central bank's advice.

The higher buffer makes banks more resilient to downturns, while potentially limiting their lending growth and abilities to pay dividends to owners.

In a separate bid to dampen the rampant growth in housing prices, the ministry also announced tighter mortgage regulations on Wednesday. (Additional reporting by Gwladys Fouche and Ole Petter Skonnord, writing by Stine Jacobsen, editing by Terje Solsvik/Jeremy Gaunt)

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