Norway Prices Blast Through Lagarde’s Lowflation Cycle

The cycle of disinflation gripping much of the developed world has bypassed Scandinavia’s richest economy.

While Sweden grapples with deflation and euro-area price growth hovers at well below half the European Central Bank’s target, inflation in Norway is outpacing forecasts. Consumer prices grew 1.8 percent in May from a year earlier, the statistics office said yesterday. Economists surveyed by Bloomberg predicted a 1.7 percent gain. Adjusting for the effect of energy and taxes, prices rose 2.3 percent.

“Most countries are struggling with too-low inflation and negative interest rates, that’s a problem in Europe,” Erik Bruce, senior economist at Nordea Bank AB in Oslo, said by phone. “In Norway we have at least higher inflation than expected and no reason to change monetary policy.” He says yesterday’s inflation data may even prompt the central bank to consider a “slightly earlier hike.”

Since the term “lowflation” was coined by International Monetary Fund Managing Director Christine Lagarde in April, there has been no shortage of data to show the phenomenon is spreading across much of the rich world. Yet in Norway, there’s little to indicate the country will follow. Western Europe’s biggest oil and gas producer boasts an unemployment rate of about 3 percent, while the government can draw on its $880 billion sovereign wealth fund to boost spending.

Strong Krone

The krone, little changed today, rose as much as 0.5 percent against the euro yesterday to its strongest level since November. The yield on the government’s 2024 bond rose three basis points to 2.68 percent as of 10:05 a.m. in Oslo.

“Higher inflation is an argument for higher rates,” Bruce said. The krone is “attractive at the moment” and the main reason for that is “a hunt for higher yields, which is the theme in the market at the moment. That means a higher Norwegian krone.”

Norges Bank Governor Oeystein Olsen kept Norway’s main interest rate at 1.5 percent in May as policy makers try to avoid stoking krone appreciation without fanning a credit bubble. Olsen reiterated a plan to tighten monetary policy in the “summer” of next year.

Rate Timing

As Norway decides on the timing of its next rate increase, other central banks in Europe are in easing mode. ECB President Mario Draghi this month cut the euro zone’s deposit rate below zero for the first time while policy makers in Sweden have signaled they’re ready to lower rates next month to tackle deflation in the largest Nordic economy.

Sweden’s krona has lost about 7 percent against Norway’s krone since a February peak.

Still, not everyone expects the central bank in Oslo will be more willing to raise rates after yesterday’s inflation report.

“We think they will treat this as a temporary upside surprise,” said Marius Gonsholt Hov, an economist at Svenska Handelsbanken AB in Oslo. At SEB AB, the view is that it remains “very uncertain if inflation will lift the rate path in June,” Chief Strategist Erica Blomgren said by phone.

Norges Bank announces its next interest rate decision on June 19.

Before it's here, it's on the Bloomberg Terminal.