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MNI INTERVIEW: Norges Bank's Nicolaisen Sees Real Wage Growth

--Nicolaisen Predicts Acceleration In Earnings Growth But Net Migration Is A
Wild Card
By David Robinson
     OSLO(MNI) - Norges Bank Deputy Governor Jon Nicolaisen expects earnings
growth to accelerate and the recent rise in inflation to be ephemeral, ensuring
a rosy outlook for real household incomes as interest rates rise, he told MNI on
     In an interview, Nicolaisen downplayed the likelihood of September's
well-trailed 25-basis-point rate hike resulting in any sudden changes in
business or consumer behaviour and outlined the case for further tightening in
the first quarter of next year.
     Inflation has surprised on the upside in recent months, with the rate of
increase in the consumer price index coming in at 3.4 percent in September while
Norges Bank's target measure, CPI-ATE, which excludes tax changes and energy
prices, was up 1.9% on the year last month.
     "We have had a couple of surprises on the consumer price side, which is
short-term noise," Nicolaisen said.
     A dry summer drove up energy prices but Nicolaisen is confident these
effects will evaporate even as upward pay pressures have increased.
     "The underlying forces are quite strong ... Consumer price inflation will
drop back so that in itself will give a rise to real household disposable
income," he said.
     "We also believe that nominal wage growth will pick up ... So there will be
a good rise in real wages," he added.
     Faster pay growth should manifest itself in the spring pay round but what
is less clear is whether Norges Bank will tighten policy again ahead of it.
     "We believe the most likely point for the next hike will be in the first
quarter next year," Nicolaisen said. He was dismissive of the case for any
prolonged delay to see how tightening plays out.
     "We will know more in a year. That doesn't mean it's right to wait a year.
There is always a balance," he said.
     Norges Bank expects most of September's 25-basis-point rate hike to be
passed on to borrowers, but the deputy governor does not anticipate its having a
large effect on economic activity.
     "We don't expect a lot of surprises after a quarter (point) increase ... it
was well broadcast in advance," he said.
     "It was expected by the actors in the economy. To some extent at least
households and firms have already adapted to higher (interest rates)," he added.
     In September's rate hike announcement Governor Oystein Olsen said that
"uncertainty surrounding the effects of higher interest rates suggests a
cautious approach to interest rate setting," but Nicolaisen does not anticipate
much impact from the hike.
     One wildcard for the earnings outlook is what happens to net migration. The
central bank is not expecting a repeat of the surge in inward migration
associated with the country's oil boom, but these things are hard to forecast.
     "We had a huge wave of immigration taking the heat off the labour market to
some extent. That could happen again ... but we don't believe we will have the
same wave because conditions abroad are better so there will be less of a
tendency to import labour," Nicolaisen said.
     Easing population growth is one of the reasons why Norges Bank is expecting
only subdued house price inflation in the near-term. The central bank's October
Financial Stability Report again drew attention to elevated household debt
levels, but risks have increased more markedly in the commercial than
residential real estate market.
     The Norges Bank, unlike its Nordic neighbours at the Riksbank, is prepared
to use monetary policy alongside macro-prudential policy to tackle financial
stability risks if needed.
     "Monetary policy has an obvious impact on debt accumulation and stuff that
really matters for financial stability and although we have other tools,
macro-prudential tools, they don't bite ... as hard as monetary policy,"
Nicolaisen said.
--MNI London Bureau; tel: +44 203-586-2223; email:
[TOPICS: MX$$$$]

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