* May be first central bank of a G10 currency to hike rates
* Finance ministry tells banks to increase their capital buffers (Adds change in bank buffer capital, background, bullet points)
OSLO, June 17 (Reuters) – Norway’s central bank kept its key interest rate unchanged on Thursday as expected, but said a hike was likely to follow in September and steepened its trajectory of subsequent rate rises as the economy recovers from the effects of COVID-19.
Norges Bank has long signalled a hike this year, which could well make it the first among the central banks of the G10 currencies group of developed economies to raise the cost of borrowing.
Economists polled by Reuters had been almost evenly split over whether Norway’s monetary policymakers would favour September or December to push the policy rate up from its record low 0.0%.
“In the committee’s current assessment of the outlook and balance of risks, the policy rate will most likely be raised in September,” Norges Bank Governor Oeystein Olsen said in a statement.
Norway’s currency, the crown, firmed to trade at 10.12 against the euro from 10.15 just before the 0800 GMT policy announcement. It then fell back to trade at 10.16 at 0840 GMT.
“The new rate path suggest two rate hikes this year, in line with our view,” Nordea Markets said in a note to clients.
The central bank now predicts the policy rate will average 0.8% in 2022, higher than the 0.5% it had forecast three months ago, and rise further in 2023 to average 1.3%, up from 1.0% expected previously.
In a related statement on Thursday, the finance ministry said it would force banks to hold more buffer capital, as recommended by the central bank, boosting solidity 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 on Wednesday signalled it may hike rates in 2023, sooner than previously expected, with a majority of its policy-makers pencilling in two quarter-percentage-point rate increases that year.
In Norway, the monetary policy committee’s revised forecasts imply a slightly faster series of rate rises towards 2024 than in previous predictions issued in March, the central bank said.
Norway cut rates three times last year to combat the impact of COVID-19, contributing to a house price boom as borrowers took advantage of cheap credit.
The economy has recovered quicker than initially expected from the pandemic but faces some delays in vaccine supply, thus causing uncertainty over the speed of its inoculation campaign.
Having contracted by 3.1% in 2020, the economy is now expected to grow by 3.8% in 2021, in line with the March prediction, and will likely see 4.1% expansion next year, stronger than the previous forecast of 3.4%. (Editing by Gwladys Fouche and John Stonestreet)
