UPDATE 2-Norway's central bank seen ditching rate hike on weak growth
* Growth outlook hits 4-year low
* Even oil service firms pare back expectations
* Central bank to give up plans for rate hike next summer (Adds analysts, detail)
By Balazs Koranyi and Camilla Knudsen
OSLO, Nov 29 (Reuters) - Norway's growth prospects continued to dim as even the lucrative oil sector became less optimistic, strengthening the case for the central bank to give up on a rate hike and maybe even consider a cut.
The outlook for growth fell to its weakest level in four years, according to a central bank survey of 328 companies released on Friday. Consumer confidence also hit a two-year low, heralding more troubles for an economy that had recorded western Europe's fastest expansion last year.
The central bank survey showed growth slowing in all sectors with retail and traditional exports performing the weakest and even oil industry suppliers, once resilient to any slowdown, reporting weakening expectations. The study often forms the core of the bank's rate decisions.
"In addition to weaker than expected cost and price inflation, this should contribute to a substantial lowering of the path for the key policy rate," Handelsbanken economist Kari Due-Andresen said.
"The question for Norges Bank is now whether they want to signal a possible rate cut in March - this data is weak enough for that to be an option - or if they prefer to keep the interest rate unchanged," she added.
The central bank, which announces its next policy decision on Thursday, had projected a rate hike for next summer as parts of the economy were seen at risk of overheating. But the outlook has changed rapidly as confidence falls, exporters struggle and increasingly strict lending rules drag house prices lower.
Growth is now seen at just 2 percent on the mainland, excluding offshore oil, below last year's 3.4 percent and some analysts suggested there is a downside risk to this forecast.
Falling house prices have been especially concerning as the market could be as much as 40 percent overvalued and household debt is around 200 percent of disposable income, one of the highest levels in Europe.
The central bank predicted that house prices could now fall as much as 10 percent, due in part to tougher capital requirements which have forced banks to hike mortgage rates.
But Norway's economy still grew by 0.5 percent in the third quarter, five times as fast as the euro zone, so it remains a relative outperformer despite its struggles.
"They forecast a growth rate of 0.5 percent in the fourth quarter while these data signal a growth of 0.3 percent," Swedbank First Securities economist Harald Magnus Andreassen said. "It's not weak enough for Norges Bank to cut rates... but they will put out the next hike."
The bank may also want to avoid a rate cut as the cooling of the real estate market is a welcome event after years of rapid price hikes, analysts said. So the bank may not want to disrupt an orderly deflation with a rate cut.
The bank may also want to stay cautious as Norway's indicators remain solid. Unemployment is barely over 3 percent, wages are still growing faster than GDP and the budget is running a surplus in excess of 10 percent of GDP, giving it plenty of firepower to counter a slowdown. (Reporting by Balazs Koranyi, Camilla Knudsen, Terje Solsvik and Ole Petter Skonnord)
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