UPDATE 3-Norway keeps rates at zero, reports September hike

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* May be the first central bank of a G10 currency to raise rates

* Ministry of Finance tells banks to increase their capital buffers (adds change in bank cushion capital, background, chips)

OSLO, June 17 (Reuters) – Norway’s central bank kept its policy rate unchanged on Thursday as expected, but said a hike is likely to follow in September and accentuate its trajectory of subsequent rate hikes as the economy recovers of the effects of COVID-19.

The Norges Bank has long reported a hike this year, which may well make it the first central bank in the G10 currencies group of developed economies to raise the cost of borrowing.

Economists polled by Reuters were almost equally divided on whether Norwegian monetary policymakers would favor September or December to push the policy rate up from its all-time low of 0.0%.

“In the current assessment of the Outlook and Balance of Risks Committee, the key rate will most likely be raised in September,” Norges Bank Governor Oeystein Olsen said in a statement.

The Norwegian currency, the krone, strengthened to trade at 10.12 against the euro against 10.15 just before the policy was announced at 0800 GMT. It then fell back to trade at 10:16 am to 8:40 am GMT.

“The new rate path suggests two rate hikes this year, in line with our view,” Nordea Markets said in a note to clients.

The central bank now forecasts that the key rate will average 0.8% in 2022, higher than the 0.5% it forecast three months ago, and will increase further in 2023 to reach 1.3% on average , against 1.0% previously forecast.

THE FED IS ALSO ACCELERATING

In a related statement Thursday, the finance ministry said it would force banks to hold more buffer capital, as recommended by the central bank, boosting soundness but also making less capital available for lending.

The buffer requirement will be 1.5% from mid-2022, up from 1.0% currently but still below the pre-pandemic level of 2.5%, the ministry said.

The U.S. Federal Reserve signaled on Wednesday that it could hike rates in 2023, sooner than expected, with the majority of its policymakers predicting two quarter-percentage point rate hikes that year.

In Norway, the revised forecast from the Monetary Policy Committee involves a series of slightly faster rate hikes around 2024 than in the previous forecast issued in March, the central bank said.

Norway cut rates three times last year to combat the impact of COVID-19, contributing to soaring house prices as borrowers took advantage of cheap credit.

The economy has recovered faster than expected from the pandemic, but faces delays in vaccine supply, causing uncertainty over the speed of its vaccination campaign.

After contracting 3.1% in 2020, the economy is now expected to grow 3.8% in 2021, as forecast in March, and is expected to expand by 4.1% next year, stronger than the previous forecast of 3.4%. (Edited by Gwladys Fouché and John Stonestreet)


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