After starting to step away from further stimulus just a little more than a month ago, Norwegian policy makers now have to contend with a bear market in oil.
Brent crude has tumbled about 20 percent from a peak in June, eating into a rally that saw prices jump more than 80 percent since January.
The renewed decline could give pause to consumers in western Europe’s biggest oil producer, who have been hit by rising unemployment over the past two years amid massive job cuts from its biggest employers in the oil industry. That may also call into question the central bank’s view from June that it was nearing the end of an easing cycle after a recovery in crude prices.
"The increase in confidence that we have seen among Norwegian households is now in danger of being reversed," said Kari Due-Andresen, chief economist at Svenska Handelsbanken in Oslo. "With the recent drop in the oil price, the central bank’s argument to lift its rate path has now weakened.”
At their latest rate meeting in June, Norwegian policy makers left their key rate at 0.5 percent and raised their outlook away from a potential zero rate, arguing that the rebound in crude would stimulate growth, consumption and investments. At the same time, they indicated that they would probably lower rates at least once more.
Besides the drop in oil, their optimism has been warranted as key indicators have signaled the worst may be over for Norway’s economy. Inflation is picking up, production levels have bottomed out and the rise in unemployment has stalled.
According to Erik Bruce, a senior economist at Nordea, that could even be enough to avoid another rate cut all together.
"As long as we stay above $40 a barrel, there won’t be a dramatic impact," Bruce said. "We should also remember that the Norwegian krone has weakened due to lower oil price. This is important in the transition we now have to go through from oil related industry to other industries.”
Policy makers also look more at forward oil prices, where the decline has not been as big, according to Bruce.
"Our prognosis is still for a rate cut in September,” he said. “However, we are at a tipping point, and we could end up with an unchanged interest rate. We were much more confident about a rate cut before the summer. Now we are more uncertain.”
The frothy housing market could also become a source of concern for the bank, which has in the past said it has kept rates higher than warranted to guard against financial instability. Data released on Wednesday showed home prices continued to surge in July, rising 8.8 percent on an annual basis, according to Real Estate Norway.
While house prices could be a concern, Due-Andresen at Handelsbanken said that improved economic data may not play much of a role since it has been in line with the central bank’s forecasts.
“The data is simply not good enough,” she said.