September 13, 2012 / 11:42 AM / 5 years ago

UPDATE 1-Norway cbank says house prices to rise further

* Norges Bank head says inflation developing as forecast

* Says money market rate premiums falling

* Mixed picture suggests bank still plans Dec rate hike (Adds detail, quotes, combines governor and deputy)

By Camilla Knudsen and Joachim Dagenborg

ARENDAL/SANDNES, Norway, Sept 13 (Reuters) - Borrowing costs for Norwegian households may drop further to fuel an already hot property market while inflation is developing as forecast, the central bank said on Thursday, playing down expectations it may delay interest rate hikes.

Bank funding has become cheaper, global interest rates are staying low longer than thought even recently and home construction is well short of required levels, Central Bank Governor Oeystein Olsen and his deputy Jan Qvigstad said separately on Thursday.

All three factor suggested the country's record property prices will go even higher, they added.

Norwegian households are among the most indebted in the world with a debt to income ratio of around 200 percent, more than twice that in Germany and a third more than the peak in the U.S. before its financial crisis.

Low interest rates and a booming domestic economy have fuelled the housing market and the gap between income growth and borrowing is expected to widen in the coming years, Statistics Norway predicted last week.

"The bank borrowing market is much better now than it was before, though it's still not very good," Qvigstad told a public forum. "This means interest rates for private individuals may come down a little..."

That meant property prices would likely rise further, though there would eventually be a correction, Olsen said, adding house building needed to be speeded up.

Norway is one of the richest countries in the world thanks to its massive oil wealth. Its economy grew by an annual 5 percent in the second quarter, the fastest in Europe, and the country needs to import thousands of workers every year to keep the labour market functioning.

Statistics Norway expects wages to grow by 4.2 percent this year while house price growth is seen over 7 percent in each of the next four years.

TIMING OF RATE HIKE

The central bank has predicted a rate hike in December or the first half of next year but some analysts said that, following an anaemic August inflation reading, it would have to delay the move.

A delay would put further upward pressure on house prices, while any hike would tend to cut inflation further, push the crown up from near record levels and threaten the country's traditional exporting industries.

Despite the August CPI reading, inflation was still developing the way the bank expected, Olsen said, suggesting its expected interest rate path was unchanged.

Core annual inflation slowed to 1.2 percent last month, undershooting market forecasts for 1.5 percent and well below Norges Bank's 2.5 percent target.

Olsen said weaker growth and low interest rates abroad argued for lower rates in Norway, while a falling premium in money market rates pointed in the opposite direction.

"The pieces in the picture are going somewhat in different directions, so we see about the same rate path as before. But we have not collected all the pieces yet, as we will do before the next monetary report (on Oct 31)," Olsen said. (Writing by Balazs Koranyi; Editing by John Stonestreet)

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