February 15, 2018 / 5:03 PM / 3 months ago

Norway may hike rates this year despite low inflation -central bank chief

OSLO, Feb 15 (Reuters) - The Norwegian central bank may raise interest rates later this year in response to higher economic growth at home and abroad, even though inflation remains well below target, Governor Oeystein Olsen said on Thursday.

Oil-exporting Norway, hit by a sharp fall in the price of crude between 2014 and 2016, has gradually recovered in the last two years along with an increase in the price of its hydrocarbons.

The central bank late last year said it planned to begin raising its policy rate from the current 0.50 percent in December of 2018, but the country’s inflation has since fallen below forecast.

“This year, the policy rate may be increased for the first time in seven years - this is a good sign,” Olsen said in his annual speech to government and business leaders, adding that growth is back on a firm footing.

“We’re heading towards brighter times both abroad and at home, and that’s why rates can finally begin to rise from an unnaturally low level, resulting in a gradual normalisation,” Olsen said in a separate Reuters interview.

He declined to say whether a hike in the key policy rate from record-lows could come earlier than the central bank’s forecast of a December tightening.

While increased economic activity will boost inflation, the advance of new technologies and a more integrated world economy are likely to exert a downward pressure on wages and prices, Olsen said in his speech.

Norges Bank targets annual core inflation of 2.5 percent over time, but in January this fell to a rate of just 1.1 percent from 1.4 percent in December, below a forecast among economists of 1.5 percent.

“In an environment of low inflation, solid economic growth and low unemployment, a conflict may arise between inflation considerations and considerations relating to the real economy,” Olsen said.

“In that situation, we would be less worried about low inflation than if real economic prospects were also weak. We can then choose to bring inflation up to target over a longer horizon, particularly if interest rates are already low and there are signs that financial imbalances are building up.”

A Norwegian rate hike would follow recent tightening in the United States, Britain and Canada, although a sharp rise in global rates remains unlikely, Olsen said.

“As conditions normalise, interest rates will likely remain lower than they were a few decades ago. The structural conditions that have depressed the global neutral interest rate will not reverse overnight,” he added.

TRILLION-DOLLAR WEALTH FUND

The central bank, which manages Norway’s $1 trillion sovereign wealth fund, the world’s largest, also reiterated earlier warnings that the fund’s value may vary significantly over time.

With close to 70 percent of assets invested in stocks, and the remaining held in bonds and real estate, the fund’s value is now almost three times larger than Norway’s annual economic output outside of the oil industry.

The fund, saved up from revenues from Norway’s oil and gas industry, pays for about 15 percent of government spending.

“Looking ahead, movements in global capital markets will be the main source of variation in the value of the fund, and at times in a negative direction. The actual stance of fiscal policy must allow for this uncertainty,” Olsen said.

“The fund had several good years following the euro crisis. Markets turned around, and quickly the loss was more than reversed. We cannot take for granted that this will always be the case.” (Editing by Toby Chopra)

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