Photographer: Kristian Helgesen/Bloomberg

Oil ‘Train Wreck’ Dominates Agenda for Central Bankers in Norway

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As the economy of western Europe’s biggest crude oil producer heads into a “train wreck in slow motion,” the central bank is running out of reasons not to cut rates next month.

That’s according to Svenska Handelsbanken AB, which says optimistic assessments from the government belie the fact that “weakness is becoming increasingly apparent” in Norway’s economy.

Though inflation is very close to the bank’s 2.5 percent target, policy makers are more “concerned about the real economy, especially in light of lower oil prices,” said Marius Gonsholt Hov, a senior economist at Handelsbanken in Oslo.

He expects Norway to cut its benchmark deposit rate by 25 basis points to a record low of 0.75 percent next month to help Norway cope with the job losses that have followed the persistent decline in oil prices.

To be sure, the oil riches that Norway has amassed over decades have helped it build the world’s biggest sovereign wealth fund. The $875 billion backstop helps shield the economy from most crises. Norwegian unemployment, just 4.3 percent in May, remains enviably low compared with most of the rest of Europe.

But Norway is now facing its worst slowdown in oil and gas investments since 2000, with petroleum companies already announcing more than 20,000 job cuts to adjust to the price shock. And though it’s from a very low level, Norway’s joblessness is rising fast, with the latest figures representing the highest rate of unemployment in more than a decade.

Krone Effect

A report last week showing a drop in industrial production confirmed a “significant” slowdown in Norway’s manufacturing sector, according to Danske Bank A/S.

As oil sinks, the Norwegian krone has followed, helping drive up import prices and keep inflation close to target. While neighboring Sweden fights back deflation, Norwegian consumer prices almost rose 2 percent last month while underlying inflation reached 2.6 percent. But that’s unlikely to stop the central bank easing policy further, Handelsbanken says.

“The reason we have inflation so close to target is because it’s a feed-through of the weakening krone,” said Gonsholt Hov. “It’s not something that will be sustained and Norges Bank is aware of that.”

A drop in crude oil prices has driven a 12 percent decline in the krone over the past 12 months, according to the Bloomberg Correlation Weighted Index, making it the biggest loser of the 10 currencies tracked in the period.

Brent crude remains below $50 per barrel. DNB ASA, Norway’s biggest bank, on Monday cut its forecast for crude prices and now sees oil at $58 per barrel in the second-half of this year, down from $74.

Focusing on the real economy over inflation is “pretty much in line with the pattern Norges Bank has shown previously,” said Joachim Bernhardsen, an analyst at Nordea Bank AB. “Running inflation has not been such a big factor in interest rate setting.”

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