Biggest Banks Split on How to Trade Next Norway Rate Cut

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Norges Bank Governor Oeystein Olsen
Oeystein Olsen, Governor of Norway's central bank. Photographer: Kristian Helgesen/Bloomberg

Bank economists tracking the Norwegian central bank can’t decide whether the next rate cut will come in May or June.

After unexpectedly keeping rates unchanged in March and signaling a 100 percent chance of a cut in one of the bank’s next two meetings, analysts are struggling to decipher the nuance of Governor Oeystein Olsen’s policy signals.

“They can use the same argument in May as they did in March and decide not to cut rates until June,” said Magne Oestnor, an analyst at DNB ASA, Norway’s biggest bank. “The reason that Norges Bank gave for not cutting in March was that we haven’t seen the effects of the oil-induced slowdown -- we’re not so certain that by May they will feel they have seen that.”

Policy makers in western Europe’s biggest crude producer cut rates in December to protect the economy from plunging oil prices. Olsen said in March that if the economy stays on its projected course -- rising unemployment and low oil prices -- he will cut rates again.

While DNB, along with Danske Bank A/S and SEB AB, interprets that as meaning no change in rates until June, two other Scandinavian banks think Olsen was implying a cut in May. Part of that analysis is based on Norway’s currency gains since December.

Inflation Goal

“Due to a strengthening in the krone, there is no more reason to use that as an argument to postpone the decision to cut the interest rate,” said Marius Gonsholt Hov, an economist at Svenska Handelsbanken AB.

Lower wage growth and lower rates in Sweden and Europe, Norway’s key trade partners, point toward a rate cut next month, according to Nordea Bank AB, the region’s largest lender.

While lower oil prices are 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 2.3 percent last month, close to the bank’s 2.5 percent target.

A bigger consideration may be extreme easing in neighboring countries, with the European Central Bank buying assets to add stimulus, and policy makers in Sweden and Denmark cutting rates deep below zero. Those measures risk leaving the Norwegian krone too strong and undermining the central bank’s inflation goal.

“Norges Bank and the markets are right in expecting a weaker outlook during the second quarter,” said Frank Jullum, chief economist at Danske Bank.

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