Norway May Deliver First Rate Cut Since 2009

Norway’s central bank will probably reduce its benchmark interest rate for the first time in more than two years as Europe’s debt crisis threatens growth and policy makers seek to check gains in the krone.

Norges Bank will cut its overnight deposit rate to 2 percent from 2.25 percent today, reversing part of a tightening cycle that began in October 2009, according to 10 of 17 economists surveyed by Bloomberg. Two predict a 0.5 percentage point cut, while five forecast an unchanged rate. The decision is scheduled for 2 p.m. in Oslo.

Policy makers in October shelved a series of planned rate increases as deepening European debt woes threaten exports and pushed up bank borrowing costs. The European Central Bank last week cut its benchmark rate to 1 percent, matching a record low and adding pressure on Norway to follow suit to avoid a strengthening of the krone.

“What we have seen so far is that the debt crisis in the euro zone has intensified, which of course will have negative effects on the Norwegian economy,” Erica Blomgren, chief strategist for Norway at SEB AB, said by phone. “But mostly we have seen stress in financial markets, which Norges Bank has shown so far that they put a lot of emphasis on.”

Photographer: Tomm W. Christiansen/Bloomberg

A customer exits a branch of Norges Bank, Norway's central bank, in Oslo. Close

A customer exits a branch of Norges Bank, Norway's central bank, in Oslo.

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Photographer: Tomm W. Christiansen/Bloomberg

A customer exits a branch of Norges Bank, Norway's central bank, in Oslo.

Debt Rescue

Norway, which sends more than 60 percent of its factory goods to Europe, saw its manufacturing output shrink last month for the first time since March 2010, while consumer confidence slumped to a 2 1/2-year low this quarter. Growth in Norway’s mainland economy, which excludes oil, gas and shipping, slowed to 0.8 percent in the third quarter from 1.3 percent through June. Norway’s statistics agency last week slashed its 2012 growth forecasts to 2.5 percent from 3.5 percent.

Meanwhile, stocks across Europe added to losses this week amid doubts measures by announced by European Union leaders after the latest summit would be enough to end the region’s debt crisis. Leaders unveiled a plan after meetings on Dec. 8 and 9 for a closer fiscal accord to save the euro, adding 200 billion euros to the International Monetary Fund’s bailout efforts and tightening rules to curb deficits. They also said they would start a 500 billion-euro permanent rescue fund next year.

Norway’s Finance Minister Sigbjoern Johnsen said last month that the world’s seventh-largest oil exporter was prepared to act should the debt crisis worsen. Norway is the only Scandinavian nation that’s not an EU member.

Straying Rates

The ECB on Dec. 8 lowered its forecast for the economy next year to a range of 0.4 percent contraction to growth of 1 percent. It previously estimated growth of 0.4 percent to 2.2 percent.

Norway’s central bank has signaled it doesn’t want its main rate to stray too far from those on in Europe to avoid fueling krone gains that hurt exports. The krone has strengthened 0.5 percent against the euro this month as investors have dumped euro assets.

European financial market concerns have also raised borrowing costs for Norwegian lenders, giving the bank more room to cut rates. The difference between the bank’s deposit rate and the three-month Norway interbank offered rate was yesterday at 90 basis points, compared with an average of 67 basis points over the past year. It was as wide as 108 basis points on Nov. 22. A basis point is 0.01 percentage point.

“A cut is necessary if a further increase in interest rate on loans to the public is to be avoided, given the higher bank funding costs,” Bjoern-Roger Wilhelmsen, chief currency strategist at First Securities in Oslo, and a former central bank economist said in a note to clients.

Housing Risk

Policy makers must also weigh a weakening global growth outlook against the potential risks of fueling a housing bubble as unemployment in the world’s second-richest nation per capita remains near a three-year low. House prices rose an annual 8.5 percent in November, according to the Norwegian Real Estate Brokers Association. Household credit growth remained at 7.2 percent in October. Record high petroleum investments, amid high oil prices, are also fueling growth.

“The macroeconomic situation in Norway doesn’t suggest any need for Norges Bank to push hard on the accelerator,” said Bjoern-Roger Wilhelmsen, chief currency strategist at First Securities ASA and a former Norges Bank economist. “Growth is supported by an investment boom in the oil and gas sector as well as housing.”

Weaker inflationary pressure also raises the scope of the central bank to cut interest rates. The underlying inflation rate, adjusted for taxes, fees and energy prices, slowed to 1 percent in November from 1.2 percent a month earlier, according to Statistics Norway.

To contact the reporter on this story: Josiane Kremer in Oslo at jkremer4@bloomberg.net

To contact the editor responsible for this story: Jonas Bergman at jbergman@bloomberg.net

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