Norway’s Shock Rate Cut Drives Krone to Lowest Since 2009
Norway’s central bank cut its main interest rate for the first time in more than two years and signaled it may ease again next year as plunging oil prices threaten growth in western Europe’s biggest crude exporter.
The rate was lowered by 0.25 percentage point to 1.25 percent, the Oslo-based bank said today. The cut was forecast by only one of the 17 economists surveyed by Bloomberg, while the rest saw unchanged rates. The bank sees a “50-50 chance” for another rate cut next year, Governor Oeystein Olsen said at a press conference.
The job now is to “prevent a severe downturn,” he said in an interview after a press conference.
The krone plunged as much as 1.8 percent against the euro and traded 1.1 percent lower at 9.0138 as of 10:56 a.m. in Oslo.
A 44 percent drop in oil prices from a June high is proving to be the worst since the financial crisis erupted in 2008. The slump comes as an investment boom in Norway’s petroleum industry fades with companies such as Statoil ASA lowering planned spending. A survey this month showed oil companies anticipate offshore investments will drop by 13 percent next year.
The bank cut its forecast for mainland growth next year, and sees the economy expanding just 1.5 percent, adjusted for offshore revenue, compared with a 2.25 percent forecast in September. Norges Bank sees a 15 percent decline in oil investments next year, versus 10 percent previously.
The fall in oil prices “will have spillover effects on the wider economy and unemployment may edge up ahead,” the bank said.
The rate outlook was “a bit more dovish than we had expected, as our estimate was for a rate cut today, and then a 25 percent probability for another rate cut on March 15,” Marius Gonsholt Hov, an economist at Svenska Handelsbanken AB, the only bank in the Bloomberg survey to predict today’s cut, said in a note.
While the oil price drop over the past six months is forcing the central bank to adjust its view on how to spur growth in the $510 billion economy, policy makers in Oslo aren’t facing the disinflationary spiral that’s hit Sweden and other parts of Europe.
Since cutting the deposit rate by half a point in December 2011, Olsen’s efforts to fight off currency speculators eager to pour into Norway’s AAA-rated markets have largely succeeded. Falling oil prices are now assisting him in that work. The krone is down more than 7 percent against the euro this year, sliding to its weakest level since 2009. Underlying inflation was 2.4 percent in November, near the central bank’s 2.5 percent target.
The bank today estimated that underlying inflation will accelerate to 2.89 percent by the end of next year and hold above the target through 2017.
(An earlier version of this story was corrected to replace Xs with reported numbers in second paragraph.)