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UPDATE 2-Norway's central bank leaves rates on hold, keeps easing bias
March 16, 2017 / 11:11 AM / 9 months ago

UPDATE 2-Norway's central bank leaves rates on hold, keeps easing bias

* Key policy rate kept at 0.5 pct

* Crown weakens against euro after news

* 2017 core inflation now seen at 1.7 pct vs 2.4 pct in Dec (adds detail, economist, updates crown)

By Camilla Knudsen and Terje Solsvik

OSLO, March 16 (Reuters) - Norway’s central bank kept its key interest rate unchanged at 0.50 percent on Thursday and maintained an easing bias as inflation pressures remain subdued, even thought the economy shows signs of recovering after a two-year slump.

A day after the U.S. Federal Reserve raised rates for the second time in three months, Norges Bank said its key policy rate could remain at its present level for several years and left the door ajar for a cut. The crown weakened on the news.

All 17 economists polled by Reuters had predicted the bank would keep the deposit rate on hold. Only two expected further cuts later in the year.

Oil-producer Norway has struggled to cope with a 60 percent drop in the price of crude, its main export, since mid-2014, but a series of rate cuts combined with heavy fiscal spending and currency weakness, have given its economy a moderate boost.

“The forecast for the key policy rate ... is close to 0.5 percent in the coming years,” said Governor Oeystein Olsen.

“At the same time, the forecast implies a slightly higher probability of a decrease than an increase in the key policy rate in the coming period.”

The biggest change in the bank’s outlook since the last rate meeting in December is falling core inflation. The bank now expects 2017 core CPI, which excludes effects of tax changes and energy prices, to reach 1.7 percent against 2.4 percent in December.

“If inflation continues to surprise to the downside, we wonder for how much longer Norges Bank can stick with this strategy. Should inflation expectations start to slip, they will certainly abandon it,” said Handelsbanken Capital Markets chief economist Kari Due-Andresen.

Nordea Markets said the message from the bank was “dovish” as they kept a 40-percent probability of a rate cut in June.

“This is closer in time now and the easing bias has to be seen as strengthened and more credible. This is relevant to the market which has ignored the easing bias,” said Nordea economist Joachim Bernhardsen.

“Today’s message signals that Norges Bank is more concerned over low inflation than we had expected.”

The crown currency was trading down at 9.1680 against the euro at 0911 GMT against 9.1146 just before the bank’s decision. (Additional reporting by Ole Petter Skonnord, writing by Gwladys Fouche, editing by Toby Chopra)

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