Krone Slides Most in Year as Norges Bank Airs Rate-Cut Option

Norway’s krone plunged the most in a year after the central bank said it may need to cut interest rates to revive economic growth in western Europe’s biggest oil producer.

The krone lost as much as 2.3 percent against the euro, its biggest decline since June 20, 2013, before trading 2.1 percent lower at 8.3403 as of 1:33 p.m. in New York. Versus the dollar, it sank as much as 2.1 percent. The currency fell at least 1.1 percent against all of its 16 major peers.

The central bank, which today left its deposit rate at 1.5 percent for a 14th consecutive meeting, pushed back the timing of monetary tightening until the end of next year, versus its previous forecast for the “summer” of 2015.

“The analyses imply that the key policy rate be held lower longer than previously projected,” Governor Oeystein Olsen said. “There are prospects that the key policy rate will remain at about today’s level to the end of 2015, followed by a gradual rise. A further weakening of the outlook for the Norwegian economy may warrant a reduction in the key policy rate.”

Scandinavia’s richest economy is slowing as offshore energy investment abates and record household debt weighs on consumers. A key survey by Norway’s statistics agency showed last week that oil companies predict investments will drop by as much as 21 percent next year as the industry grapples with high costs. The central bank predicts a 10 percent drop in oil investments in 2015.

30% Probability

“Norges Bank did take the latest petroleum tally quite seriously,” said Erlend Loedemel, chief economist at Arctic Securities in Oslo. The low point in the bank’s rate path -- of 1.43 percent in 2014 -- “indicates that there is a significant chance, 30 percent, for a rate cut this year,” he said.

Olsen said the outlook for interest rates outside Norway also contributed to a lower forecast. The European Central Bank this month cut its deposit rate below zero for the first time, while policy makers in Sweden have signaled they’re ready to lower rates next month to keep deflation from taking hold in the largest Nordic economy.

Olsen said a year ago that he was ready to cut rates should krone strength hamper the bank’s policy goals. Before today’s announcement, the currency had weakened about 6 percent against the euro during the past 12 months, pushing underlying inflation to 2.6 percent in March this year, exceeding the 2.5 percent target for the first time since 2009.

“Norges Bank again shows strong unwillingness to deviate from monetary policy abroad,” Erica Blomgren, chief strategist at SEB AB in Oslo, said in a note. That reflects the bank’s “fear of a substantial krone appreciation.”

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