Norway Signals Reduction After Unexpectedly Holding Rate
Norway’s central bank unexpectedly left interest rates unchanged and signaled another cut to protect the economy against a plunge in oil prices. The krone surged.
The overnight deposit rate was kept at 1.25 percent, the Oslo-based bank said. The decision was forecast by only one of 19 economists surveyed by Bloomberg, while the remainder estimated a reduction. The bank predicted its rate may drop to as low as 0.95 percent in the first quarter of next year, versus a December forecast of 1.13 percent. The krone gained as much as 3.1 percent against the euro, the most since 2008, and traded at 8.8621 as of 12:38 p.m.
“We chose to keep the rate unchanged but given that our estimates come through, there are prospects that interest rates are going to be lowered in spring or summer,” Governor Oeystein Olsen said in an interview after a press conference.
Policy makers in December cut rates to spur growth as a 50 percent drop in crude prices pummels the economy of western Europe’s biggest oil and gas producer. The slowdown is coinciding with a return to extreme easing from the world’s biggest central banks. The European Central Bank last week started buying debt to add to stimulus, while neighboring policy makers in Sweden and Denmark have cut rates deep below zero.
Easing Likely
“A rate cut remains likely at the next meeting,” Colin Bermingham, an economist at BNP Paribas in London, said in a note. “Weakness in the economy should be more evident by then and this is likely to prompt a reduction in the policy rate to 1 percent.”
“In December we cut our rate as a hedge against much weaker development in the real economy — that has not come through so far,” Olsen said. “That gives us the opportunity to wait and see now.”
While the oil price drop over the past nine months is forcing the central bank to adjust its view on how to spur growth in the $510 billion economy, policy makers aren’t facing the disinflationary spiral that’s hit Sweden and other parts of Europe. Underlying consumer prices gained 2.4 percent last month, close to the bank’s 2.5 percent target.
The bank today forecast that mainland economic growth, which strips out oil and gas production, will slow to 1.5 percent this year from 2.3 percent in 2014. Growth will be 2 percent in 2016 and 2.5 percent in 2017. Petroleum investments will fall 15 percent this year and 10 percent in 2016, the bank said. Surveyed unemployment will average 4 percent through 2017.
Oil Drift
“Unemployment has remained stable and been slightly lower than projected,” the bank said. “The outlook ahead is somewhat weaker than anticipated in December. Oil prices have continued to drift down and activity in the petroleum industry may decrease to a further extent than assumed earlier.”
At the same time the government is working on plans to cool a run-away housing market. Norwegians owe their creditors about twice as much as they make in disposable incomes, more than at any time in the country’s history. House prices jumped about 9 percent in February from a year earlier to a record high.
Central Bank of Norway Press Release: KEY POLICY RATE UNCHANGED AT 1.25 PERCENT
Source: Bloomberg – Norway Signals Reduction After Unexpectedly Holding Rate
