Norway on Bubble Watch as Anxiety Over Oil Plunge Recedes

The central bank governor of western Europe’s biggest crude producer is becoming less concerned over the plunge in oil prices.

Threats from Norway’s hot housing market have trumped anxiety that forced Governor Oeystein Olsen, 63, to deliver a surprise rate cut in December, when oil sank to about $63. That rate reduction has helped mitigate risks of an oil-induced crisis, as evidence in the real economy shows, he said.

“We could now be characterized as leaning slightly against the wind,” he said in a March 20 interview in his Oslo office, a day after unexpectedly keeping rates unchanged. “The former risk hasn’t disappeared, but a few months have passed and we have not seen a more severe downturn.”

Olsen’s decision to keep rates unchanged stunned markets, and sent the krone down as much as 3 percent. It was particularly surprising since oil as slid 14 percent since the December meeting and as central banks across Europe have kick-started massive stimulus programs.

The seven-member board kept the overnight deposit rate at 1.25 percent last week, even as it signaled that it may need to cut rates as soon as May. The bank’s rate projection shows it expects to lower rates to 1 percent, and maybe even lower, by the first quarter of next year. That compares to near zero rates at the European Central Bank and to negative rates from Sweden to Switzerland.

The krone strengthened 0.8 percent against the euro to 8.610 as of 4:48 p.m. in Oslo. Norway’s two-year yield was little changed at 0.77 percent.

Timing Matter

The difference between market expectations and what the bank did “is more a matter of timing and perhaps different weighting of different types of risks,” Olsen said.

The government is also working on plans to cool a run-away housing market. Norwegians owe their creditors about twice as much as they make in disposable incomes, more than at any time in the country’s history. House prices jumped about 9 percent in February from a year earlier to a record high.

The so-called lean-against-the-wind focus comes as policy makers in Sweden are resorting to unprecedented measures, including government bond purchases, to prevent disinflation from taking hold. The Riksbank’s current troubles have been blamed on rate increases back in 2010 and 2011, when the Swedish bank emerged as one of the main proponents of a lean-against-the-wind policy.

‘Ill-Advised’

Olsen’s decision to hold rates was “ill-advised,” said Kari Due-Andresen, senior economist at Svenska Handelsbanken AB. “The housing market is not what’s going to tip the economy.”

She sees Norges Bank being forced to act on its signal for another cut as early as May, followed by more easing in December. “It takes time for the shock to hit the whole economy, I think we will continue to fare worse and worse as we go forward -- then the housing market will cool.”

Olsen’s reluctance to immediately cut rates further comes as Norway, Scandinavia’s richest nation, is facing a slowdown in its petroleum industry as oil investments are seen dropping about 15 percent this year, according to the bank. Crude prices have plunged more than 50 percent since a June high, threatening an economy where oil and gas make up almost a quarter of gross domestic product.

Krone Buffer

Still, the shift has yet to turn into any major increase in unemployment, which the central bank highlighted. It anticipates that surveyed unemployment will average 4 percent through 2017. The jobless rate was 3.7 percent in December.

The bank also forecast that mainland economic growth, which strips out oil and gas production, will slow to 1.5 percent this year from 2.3 percent in 2014. Growth will be 2 percent in 2016 and 2.5 percent in 2017.

The economy has also been helped by a weakening of the krone, which “serves as a buffer,” Olsen said. “The interest rate was lowered, that also helps.”

The currency is “not only a significant but a very important variable because it’s an important channel for the inflation outlook and also the real economy,” he said. “In regards to housing prices, we’re leaning against the wind. We’ve been doing that for quite some time.”

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