Norway's underlying inflation casts doubt on rate cut

OSLO (Reuters) -Norway's annual core inflation rate held steady at 3.1% in August, in line with July, official data showed on Wednesday, but underlying data pointed to an acceleration of prices, casting doubt on the prospect of interest rate cuts.

Norway's currency, the crown, strengthened slightly on the news, trading at 11.61 at 1009 GMT against 11.66 shortly before the data release.

While Statistics Norway's (SSB) August core inflation reading had appeared to be in line with analyst forecasts and the central bank's prediction, which both stood at 3.1%, it did not take into account a change in day-care costs.

SSB in a statement said that without the government's increase in day-care subsidies, which kicked in last month, inflation would have risen by an estimated 0.4 percentage points more.

Underlying core inflation thus stood closer to 3.5% year-on-year, Handelsbanken said in a note to clients, well above the central bank's 3.1% expectation.

Norges Bank, which targets core inflation of 2.0%, is scheduled to make its next policy rate announcement on September 18.

"Altogether, today's figures were stronger than expected... This raises questions about whether (Norges) Bank will deliver a cut next week," Handelsbanken wrote.

The Norwegian economy has been stronger than expected this year but the central bank cut rates in June when prices eased, its first reduction of borrowing costs in five years.

On Thursday the central bank will release its quarterly business activity survey, known as a regional network report.

"An upside surprise in tomorrow's regional network could be enough for Norges Bank to postpone the expected rate cut," brokers DNB Carnegie said in a note.

(Reporting by Louise Breusch Rasmussen, editing by Anna Ringstrom and Hugh Lawson)