UPDATE 2-REFILE-Norway brings forward rate hikes but sees them as limited

Thu Sep 19, 2013 7:32am EDT

Related Topics

* Keeps rates on hold at 1.5 pct

* Sees rate hike next summer vs end 2014

* Cut 2013 mainland GDP growth to 1.75 percent from 2.5 pct

* Raises 2013, 2014 inflation forecast

By Balazs Koranyi and Camilla Knudsen

OSLO, Sept 19 (Reuters) - Norway's central bank said on Thursday it will start hiking interest rates earlier than it had predicted, but it struck a dovish note by stressing the likely limited extent of increases.

Trying to reconcile conflicting pressures of rising inflation and a slow economy, the central bank said it would bring forward a rate rise to next summer or even sooner, well ahead of previous guidance for the end of 2014.

But any more hikes after that would be gradual and there is likely to be just one more 25 basis point move by the summer of 2015 as the economy could not handle too rapid tightening, it said.

The tone of the central bank's message was less hawkish than some had expected as it described economic growth as moderate, the inflation jump as temporary and the housing market as cooling.

The bank as expected kept rates on hold at 1.5 percent - the level they have been at since a 25 basis point cut in March last year.

"In June we thought it was more likely that rates would go down rather than up. Now we think it's most likely that they will be unchanged until next summer, then rise gradually," central bank Deputy Governor Jan Qvigstad said.

The bank has been in a dilemma all summer after a string of big data surprises pulled it in opposing directions.

Growth in the economy, Europe's best last year thanks to a booming oil sector, came close to a halt in the second quarter, supporting calls for a rate cut. The weakening crown, an overheating housing market, and rising food and energy prices all added pressure for higher rates.

Core inflation at 2.5 percent is running a full percentage point above the central bank's June forecast, hitting the bank's target rate years before the bank said it would.

LESS HAWKISH

"They were not quite as aggressively as many in the market had expected after inflation figures," Frank Jullum, a chief economist at Danske Bank said. "A March rate hike is not fully priced in for March so it could come between March and June."

The crown currency initially weakened on the decision, then settled about a quarter percent stronger.

The bank was cautious about future hikes as growth is expected to slow more than markets had predicted, and the overheating housing market, the bank's top concern over the past several years, is cooling more than earlier predicted.

"The signs of weakness had a much stronger impact on Norges Bank's view on the economy looking ahead," Nordea economist Erik Bruce said.

The economy weathered Europe's crisis relatively unharmed thanks to record high oil investments but weak overseas markets, stagnating competitiveness, and sharply lower consumer spending put the brakes on growth.

The bank lowered its 2013 forecast for growth on the mainland - excluding the volatile offshore sector - to 1.75 percent from 2.5 percent, below analysts' expectation for a cut to 2 percent. It also lowered its 2014 growth forecast to 2.25 from 2.75 percent.

But it also cautioned about the property market, saying that housing debt is still rising faster than incomes and there was risk that the price falls could trigger or amplify an economic downturn.

"We agree that the rise in inflation in large part is temporary, and that there are reasons to not react markedly on the recent inflation numbers," DNB economist Kyrre Aamdal said. "We expect that the policy rate will be raised in the autumn next year."

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