–Adds analyst comment, market reaction, more detail

BRUSSELS (MNI) – Norway’s central bank left its key policy rate at
2% for a fourth-straight meeting on Wednesday and hinted that a lower
than expected inflation rate see it holding the rate longer than it
previously expected.

In a dovish statement, the Norges Bank reiterated its plan to
gradually normalize the key policy rate and said that – aside from
inflation – other economic indicators, as well as the Norwegian krone
exchange rate, were developing in line with its projections.

“In Norway, inflation is low and somewhat below the central bank’s
target of 2.5%,” Norges Bank Deputy Governor Jan Qvigstad said in a
statement published on the central bank’s web site.

“Activity is increasing in the Norwegian economy, although there is
still some margin of spare capacity. Interest rates in other countries
are low. On balance, these factors suggest that the interest rate should
be kept unchanged at 2%,” Qvigstad added.

“This clearly suggests that Norges Bank’s inflation forecast will
be revised lower in the next Monetary Policy Report (in October), and
that the rate path will see some downward revision as well,” analysts at
SEB said in a note to investors. “We thus reiterate our forecast that
the next hike will come next spring,” SEB said.

The Norwegian core annual inflation rate was 1.4% in August, well
below the Norges Bank’s 2.5% target.

“New information may indicate that inflation in the coming months
will be slightly lower than projected in June,” the Norges Bank
statement said.

“Today’s assessment was slightly more dovish than expected, in our
view,” said Nick Verdi, an economist at Barclays Capital.

“Barring significant upside surprises on the external economy over
the next month, the Executive Board’s fairly cautious assessment is
likely to remain intact at the October meeting,” Verdi said, adding that
he expects a 25 basis point hike in December.

The central bank reiterated its plan to gradually normalise the key
policy rate, and to keep it in the interval 1.5%-2.5% until it updates
its forecast path and economic projections on October 27. Several
economists expect the Norges Bank to revise its rate path lower at that
meeting.

At the moment, most analysts and economists are expecting the next
hike to come at the end of this year or early next year, with the
central bank on hold as it waits to assess developments in the
international economy. But Wednesday’s statement may force them to
change their predictions and push the timing of the next hike back.

The Norwegian krone strengthened against the euro in the aftermath
of the announcement, most likely because Wednesday’s statement didn’t
give any indication about whether the Norges Bank would change its rate
path at its October meeting.

The Euro fell to a six-day low of Nok7.8898 against the Norwegian
krone in the aftermath of the statement, from Nok7.9342 ahead of it.

Ahead of the announcement, markets had priced in an unchanged key
policy rate until May 2011, well beyond the Norges Bank’s current rate
path, which sees a hike in December 2010 or January 2011.

“Activity among some of Norway’s most important trading partners
increased more than expected in the first half of the year and growth in
Asia remains high,” the central bank said.

“However, growth prospects in the US have been lowered” and
“slightly slower growth is also likely in the euro area ahead,” it
added.

The Norges Bank is currently in a tightening cycle, raising the key
policy rate back to a “normal level” after slashing it to 1.25% in 2009
to stave off the impact of the global financial crisis. However, after
raising the rate to 2% in May, it has remained on hold at the past three
meetings in June, August and September.

–Brussels: 0032 487 (0) 32 803 665, echarlton@marketnews.com

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