March 14, 2012 / 3:03 PM / 6 years ago

Norway cuts rates to rein in runaway currency

OSLO (Reuters) - Norway’s central bank unexpectedly cut interest rates on Wednesday as it battles a strong currency and stubbornly low inflation, raising the risk that low rates could pump up an already developing housing bubble.

The bank cut its key policy rate to 1.50 percent from 1.75 percent, the lowest since late 2009, confounding investor expectations that fears about overheating in Europe’s star-performer economy would override concerns about the currency.

“Weak growth prospects abroad and the strong krone are contributing to keeping inflation low and dampening economic growth in Norway, even if activity in some industries in Norway remains buoyant,” Norges Bank Governor Oeystein Olsen said.

Olsen said the strong crown by itself may warrant further cuts but the bank would likely stay on hold through 2012 because low rates may induce households to take on excessive debt.

The crown fell to a one-month low against both the euro and the dollar after the rate cut announcement.

But analysts said the central bank was taking far too relaxed a view of the household debt problem.

“This is really, really dangerous,” said Frank Jullum, chief economist at Fokus Bank, noting that the financial supervisor warned just a day earlier that high household debt was the single biggest risk to the bank sector.

“This sends a message to the domestic sector, especially households, that interest rates are going to stay low for a very, very long time. And that is a dangerous signal to send,” Jullum added.

Last month the International Monetary Fund warned that Norwegian house prices were 15 to 20 percent overvalued, while the house price-to-income ratio was even higher than before the last house price crash in the early 1990s.

Others point out that commercial banks did not pass on the central bank’s 50 basis point cut in December and may continue to show restraint.

But house prices are seen rising almost twice as fast as wages this year, Statistics Norway has said, and household debt is set to top 200 percent of disposable income, more than twice that in Germany and a third more than the peak in the United States before its crash.

LOW RATE RISK

Most economists said the economy does not need more stimulus.

“I worry the current rate is too low, that the central bank is moving too far because growth is still solid,” said Stein Bruun, Chief Economist at SEB. “Recent indicators have surprised on the upside.”

Although Norges Bank cut its 2012 economic growth forecast for the mainland, which excludes the lucrative oil sector, to 3.25 percent from 3.75 percent, such a rate would almost certainly outstrip any of the 27 European Union members.

Healthy banks, low unemployment, and no net debt have given Norway a solid footing, while soaring oil prices have insulated it from Europe’s meltdown. The country also boasts a $600 billion wealth fund - a saving of $120,000 per man, woman and child.

But its rude financial health has been the cause of its currency misery.

Investors have poured so much money into Norwegian assets that the crown had been hitting nine-year highs recently, and many in the market predict more firming ahead.

That has hurt much of Norway’s manufacturing sector - who welcomed the cut - just as European demand is evaporating, and has also kept inflation at half the bank’s 2.5 percent target.

“This will take some of pressure off the crown, which has been untenable over time for industry,” said Stein Lier-Hansen, head of Norsk Industri, whose members are major exporters.

Additional reporting by Victoria Klesty, Terje Solsvik, Ole Petter Skonnord, Camilla Knudsen, Henrik Stolen; Editing by Hugh Lawson

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