OSLO Feb 13 Norway's interest rates will stay low for years but the economy is showing cracks as the oil sector cools off, and loose monetary policies will not be enough to sustain higher growth, the central bank governor said on Thursday.
Costs have become too high, due to an offshore oil boom that appears to be running out of steam, and the currency's depreciation cannot prop up Norway's eroding competitiveness, Norges Bank Governor Oeystein Olsen said in his main annual policy address.
"We can't expect the increasing terms of trade which we have benefited so much from to continue, we should be prepared for the future ... where keeping up growth and unemployment low become more similar to what other countries face," he said.
He also warned that expansionary fiscal policies may exacerbate the problem and Norway is spending more and more of its oil money, even as spending measured as a portion of saved up oil revenues was declining.
Norway's economic growth on the mainland, or excluding the offshore oil and shipping sectors, slowed to 2.0 percent last year from 3.4 percent a year earlier as consumption fell, house prices dropped and confidence took a hit.
Although the country's growth rate is still nearly twice the euro zone's, oil investments, a key plank in expansion, is seen levelling off next year and could possibly fall thereafter.
Oil output dropped to a 25-year low last year and even a slew of new projects under way will produce just a modest boost as North Sea fields mature.
Sluggish growth and low rates abroad forced the central bank in December to delay a planned rate hike by a year to the summer of 2015, sending the crown currency to a four-year low.
"Given the prevailing long-term interest rates abroad, it will likely take a number of years for interest rates in Norway to move up towards a level that was previously considered normal," Olsen said.
But he warned that loose policies and the weak crown were not solving any of Norway's fundamental problems.
"You can't rely on the exchange rate as the sole buffer to solve our competitive challenge. It just won't happen in the long run," Olsen said. "Monetary policy easing and low interest rates do not lead to a sustainable level of high growth."
Norwegian labour unit costs have increased by around 70 percent since 2000, the fastest rate anywhere in the OECD. Costs in Germany and Sweden, two key trading partners, were up less than 20 percent over the same period.
Meanwhile, costs in the oil sectors increased by 7 percent a year on average between 2005 and 2012, pulling costs higher across all sectors.
Olsen warned that at the end of such a boom, Norway risks getting stuck with high costs, some of the highest wages in the world, low growth, low competitiveness growth and rising unemployment. (Writing by Balazs Koranyi; Editing by Robin Pomeroy)