UPDATE 3-Norway delays rate hike as Europe struggles on

Wed Oct 31, 2012 12:21pm EDT

* Central bank sees next rate hike in March-Aug

* Separate move to stop buying FX for oil fund boosts crown

* 2013 non-oil sector growth forecast cut to 3 pct

* Says domestic factors alone would warrant a hike (Adds detail, analysts, earlier data)

By Balazs Koranyi and Victoria Klesty

OSLO, Oct 31 (Reuters) - Europe's top performing economy Norway kept interest rates steady on Wednesday and will delay its next hike, expecting damage from the euro crisis to keep its currency strong and to cool the pace of growth.

The bank pushed back the rate move as the continent's slow growth and Norway's status as a rare economic star risks driving the crown currency even stronger, eroding competitiveness and curbing the country's already low inflation rate.

The strength of the crown has been a persistent worry. It soared on Wednesday when the bank in a separate move said it would stop buying foreign currency for the nation's oil wealth fund in November, defying expectations for big purchases.

"It seems that Norges Bank is in no hurry to hike in the short term," Handelsbanken economist Knut Anton Mork said. "The rate path is likely to remain static during the first half of 2013 because of low price inflation and low international interest rate levels."

With a stable economy fuelled by an offshore oil boom and with no public debt, Norway's tiny fixed income market has been a favourite among investors seeking a safe haven and the crown has traded near its all-time high for much of this year.

The strong crown, which looks set to keep inflation below the bank's 2.5 percent target for years to come, forces the bank to stay cautious, even though domestic factors including a house price boom would warrant rate hikes.

Growth on the mainland, excluding the lucrative oil sector, is seen at 3 percent next year, even as the European Union stagnates, while unemployment is a barely visible 3.1 percent and the budget runs a huge surplus.

The country manages a wealth fund worth $650 billion, or $130,000 for each of Norway's 5 million people.

Growth has been so healthy that house prices soared to new records this year, drawing warnings from institutions such as the International Monetary Fund and Organisation for Economic Co-operation and Development that it was at risk of developing a housing market bubble.

Indeed, Norges Bank has repeatedly said its next move would have to be a hike but on Wednesday it said such a move would come between March and August, later than its June forecast for the first half of 2013.

"The reason why Norges Bank lowered its interest rate forecast was that the crown is stronger than expected and interest rates abroad are lower," Nordea said in a note. "Add to this that inflation was lower than expected."

At 1415 GMT, the crown was a half a percent firmer on the day, trading at 7.3920 per euro as the new rate forecast also gave the currency a boost.

While the domestic economy is still performing well, Norges Bank cut its mainland growth forecast to 3 percent from 3.25 percent.

Retail and credit data earlier on Wednesday also indicated that growth was still robust but less so than in the second quarter when the overall economy expanded by an annual 5 percent, the top rate anywhere in Europe.

Regardless of any slowdown, Norway's boom will last for years to come, the bank said, as oil investments soar 9 percent next year from already record levels, keeping wage growth over 4 percent for years to come and the country close to full employment despite rapid immigration. (Addition reporting by Victoria Klesty, Vegard Botterli, Nerijus Adomaitis, Camilla Knudsen and Terje Solsvik; Editing by Ruth Pitchford)