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UPDATE 1-Norway GDP contracting less, rates to rise faster, agency says

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OSLO, Sept 11 (Reuters) - The Norwegian economy is now expected to contract by 3.2% this year, less than the 3.9% drop predicted in June, while interest rates will begin to rise by the middle of next year, Statistics Norway (SSB) said in an updated forecast on Friday.

While hard hit by the fallout from the coronavirus pandemic, the economy of Western Europe’s larget oil and gas producer is still performing better than the average of European countries.

Interest rates are now predicted to begin to rise from the middle of 2021, SSB said, earlier than its previous prediction of rate hikes from 2022 onwards.

Norges Bank, which is due to release updated forecasts for growth and interest rates on Sept. 24, has said it aims to increase the cost of borrowing in late 2022.

“Since Norges Bank lowered the interest rate to zero, we have seen strong growth in house prices,” SSB said. “This is likely to accelerate the first interest rate hike.”

Gross domestic product for the mainland economy is expected to rebound sharply next year, with growth projected at 3.6%, which is down from the 4.3% seen three months ago.

“The Norwegian economy will continue to catch up as we move forward, but the aftermath of the infection control measures and the downturn in the international economy is likely to mean that the downturn here at home will persist for several years,” SSB said.

Interest rates will likely rise to 0.75% in 2023, it added. (Reporting by Terje Solsvik, editing by Gwladys Fouche)