Norway’s Central Bank Seen Waiting Until June to Deliver Cut

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Norway Names Olsen as Central Bank Governor
Oeystein Olsen poses in this undated handout photograph. Source: Statistics Norway via Bloomberg

Norway’s central bank may wait another month before it delivers the interest-rate cut it has all but promised.

Ten of the 19 economists surveyed by Bloomberg expect Norges Bank to keep its overnight deposit rate at 1.25 percent in a decision scheduled to be announced at 10 a.m. on Thursday. The other nine say the rate will be lowered to 1 percent.

Governor Oeystein Olsen is trying to calibrate policy to contain a surging housing market while protecting western Europe’s biggest oil producer from a slump in crude prices. After cutting rates in December for the first time in almost three years, Olsen didn’t ease in March, but signaled a 100 percent chance for another cut either this month or in June.

The message has split economists. At DNB ASA, Norway’s biggest bank, the view is that there’s not enough evidence of an oil-induced slowdown to “alter the view of Norges Bank when it comes to the economy,” said Kjersti Haugland, an analyst at DNB. Only signs of a slowdown in the housing market will free the bank to cut rates again, she said.

Traders and investors are also reluctant to price in a full quarter-point rate cut by June. Three-month forward-rate agreements maturing in September have risen to 1.30 percent from as low as 0.92 percent in March. They settle to the Norwegian interbank offered rate, which is at 1.46 percent.

The krone gained 0.04 percent to 8.4763 per euro as of 9:18 a.m. in Oslo.

Crude Recovery

Brent crude has recovered about 43 percent since a January low. That’s reduced some of the pressure on the central bank to cut rates again, despite signs of weakness in the labor market. Surveyed unemployment reached 4.1 percent in February, the highest level since at least 2006.

Olsen also has to consider a more-than 4 percent strengthening of the krone since he decided to leave rates unchanged in March. The move has put him at odds with his peers elsewhere, most notably the European Central Bank and the Swedish Riksbank, which have both resorted to quantitative easing programs to support record-low rates.

Haugland said there’s a “high probability” of a Norwegian rate cut this week since the “absence of a cut will send the krone off into a strengthening trend -- that would eventually be problematic.”

Olsen this week talked down the strength of the krone, saying that on a trade weighted basis it was still in line with the bank’s forecasts. The import-weighted krone has risen 5.8 percent since March 18.

SEB AB said that given the uncertainty over whether the bank will cut, Olsen can probably get away with not easing without strengthening the krone too much further.

That could be a mistake, according to Marius Gonsholt Hov, an economist at Svenska Handelsbanken AB.

The bank “should act sooner rather than later” or it will risk having to compensate with expansionary policy to stem krone gains, he said.

“Slower economic growth is visible and we see muted wage and inflation pressures, so we expect a cut this week,” Gonsholt Hov said. Still, it’s “not a done deal,” he said.

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