Norway Seen Keeping Rates Unchanged After Stemming Krone Gains
The bank will leave its overnight deposit rate at 1.5 percent in a decision due to be announced at 2 p.m. today in Oslo, according to 18 of 23 economists surveyed by Bloomberg. Five economists predict the bank will cut to 1.25 percent.
Governor Oeystein Olsen, who has kept the benchmark unchanged for more than 12 months, has signaled his readiness to cut the rate further to stem a currency appreciation that’s pushed inflation below target and hurt exporters. Since the comments in March, the krone, which emerged as a haven from Europe’s debt crisis, has dipped 2.5 percent against the euro, and touched a 15-month low last month.
“It will likely stay on hold at this juncture, given the significant weakening of the krone, which traditionally has had a strong impact on the central bank’s monetary policy,” Erlend Loedemel, chief economist at Arctic Securities in Oslo, said yesterday in an e-mail. “Given that the market seems to discount at least a significant chance of a rate cut this summer, the krone will likely strengthen if Norges Bank doesn’t signal a possibility of a near-term rate cut.”
Norway’s economy is starting to feel the fallout from Europe’s debt crisis, pushing unemployment to the highest level in more than two years. The government yesterday unveiled its most expansionary budget in four years, proposing to spend more oil money that will stimulate the economy by 0.6 percentage points. Western Europe’s largest oil exporter will use 125 billion kroner ($21 billion) of its sovereign wealth fund to plug deficits this year, up from 105 billion kroner last year the Finance Ministry said yesterday.
“It will be hard for Norges Bank to avoid the conclusion that fiscal policy is slightly more expansionary than expected,” Erik Bruce, a senior economist at Nordea Bank AB said in a note to clients. “It should, however, be yet another argument to not consider a rate cut as an alternative to unchanged rates.”
Inflation slowed for a second month in March to the weakest pace since April last year. Price growth has remained below the central bank’s 2.5 percent target since mid-2009 and is now at a “disturbingly low” level, Olsen said last month.
Record-low interest rates in the U.S., a rate cut in the euro area and stimulus measures in Japan are also putting pressure on Norway to ease policy to avoid currency gains.
Policy makers have signaled they are reluctant to cut rates to avoid stoking debt growth. Near record-low borrowing costs have helped boost house prices and will push private debt levels to about 200 percent of disposable incomes this year, the central bank estimates.
The government also yesterday cut its forecast for mainland economic growth in 2013 to 2.6 percent from 2.9 percent and predicted a 3 percent expansion next year. Total sales abroad will fall 1.3 percent this year as exporters struggle with falling demand from crisis-stricken trading partners and a krone that has surged 27 percent versus the euro since the end of 2008.
“Signs for a moderate slowdown in the domestic economy together with the downgrade of the inflation outlook might be sufficient for Norges Bank to cut the signal rate to 1.25 percent,” Harald Magnus Andreassen, chief economist at Swedbank First Securities in Oslo, said in a note to clients. “We think the bank will wait and see. The economy has not slowed down so abruptly that a cut is unavoidable or even necessary.”
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