August 10, 2011 / 12:46 PM / 8 years ago

UPDATE 3-Crisis pushes Norway cbank to rates climbdown

* Keeps key rate at 2.25 pct, shelves hike amid tumult

* Sets aside planned tightening cycle, mum on outlook

* Some analysts see flat rate path for 2011 if crisis lasts

* Crown weakens vs euro, then recovers; market rates drop

(Recasts, updates crown, adds analysts, background, detail)

By Walter Gibbs and Camilla Knudsen

OSLO, Aug 10 (Reuters) - The central bank in oil-rich Norway scrapped firm plans for an interest rate hike, keeping borrowing costs at 2.25 percent because of mounting debt and growth pressures abroad and giving no hint when they might rise.

Back in June Norges Bank had signalled clearly it would hike its main deposit rate by a quarter point to 2.50 percent on Wednesday, and that it was likely to raise it once or twice more this year to curb inflation and ease a tight labour market as Norway’s economy accelerated.

One analyst said she now expected rates to stay on hold for the rest of 2011 as the global economic storm buffets the Nordic region’s most prosperous corner. Central Bank Governor Oeystein Olsen gave little indication where rates would go.

“Right now we are going through great uncertainty,” Olsen told Reuters, “so it’s not sensible to lock ourselves to a certain decision six weeks ahead of time. We will look around at developments and think afresh about matters then.”

The next rate-setting meeting is set for September 21.

After Wednesday’s decision the euro immediately strengthened against the Norwegian crown to 7.8470 crowns from around 7.7983. It traded at 7.8254 at 1456 GMT.

“Assuming that the development globally continues to be weak I expect the central bank to keep rates on hold throughout the remainder of this year,” said Elisabeth Holvik, chief economist at Sparebank 1 Group.

In June, the bank had projected two or three hikes from August to December and implied two or three more by next summer, by which time it saw its key policy rate at 3.5 percent.

All but one of 10 analysts surveyed by Reuters last week had said the bank was likely to raise its key rate to 2.50 percent.

But as stock markets and oil prices plunged and money markets tightened in recent days, several economists said Olsen had little choice but to bend.

“The reason is that these are uncertain times and we have low rates everywhere (outside Norway),” said Harald Magnus Andreassen, chief economist at First Securities,

“If the financial instability in Europe continues and if we see that growth figures are weaker than expected, Norges Bank will not increase rates for a good while.”

The country’s three-month interbank lending rate fell to 3.05 percent from 3.14 percent before the rate decision, although it was up from 2.95 percent two weeks ago.

Among Western countries Norway is unique, with an oil-backed sovereign wealth fund worth $533 billion and fairly robust economic growth after the country sailed practically unscathed through the 2008-2009 financial crisis.

Non-oil GDP grew 0.6 percent in the first quarter after expanding 2.1 percent through 2010, and the central bank projects 3 percent growth in 2011 and 3.75 percent in 2012.

Yet the euro-zone debt crisis and last week’s downgrade of U.S. sovereign debt have shaken a belief that Norway could ride out a renewed crisis on its oil cushion — especially after Brent oil for September LCOc1 fell below $100 per barrel earlier this week from $119 on July 21.

“The central bank is going to have to take it easy going forward,” said chief economnist Stein Bruun of SEB.

Norges Bank’s decision may say something about the rate-setting calculus in next-door Sweden, which posted second-quarter GDP growth of 5.3 percent year-on-year.

Most analysts there expect the Riksbank to hike rates for an eighth straight meeting on Sept 6, but some said a pause may soon be in order as signs point to cooling global demand for Swedish exports. Sweden’s repo rate is currently 2 percent.

“After the decision by the Norwegian central bank the probability that the Swedish central bank will hike the repo rate has lessened,” said SEB macrostrategist Olle Holmgren.

The European Central Bank has paused a policy tightening series it began in April and last week held interest rates at 1.5 percent amid growing evidence the euro zone recovery was losing momentum.

Hours before Wednesday’s rate meeting in Norway, the statistics bureau reported an annualised core inflation rate of 1.2 percent for July.

That slightly exceeded analyst forecasts, but after weak price growth in June the new figure brought the trend into line with central bank projections for a 1 percent rise for 2011, analysts said.

Norges Bank’s primary mandate is to keep inflation around 2.5 percent in the long term.

(With reporting by Martine Sletmoen, Terje Solsvik, Gwladys Fouche, Henrik Stoelen, Ole Petter Skonnord and Joachim Dagenborg in Oslo and John Stonestreet in London; editing by Stephen Nisbet)

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