Don't Panic, Commerzbank Tells Norges Bank as Crude Plunges

A deepening decline in Brent crude, with prices briefly dipping below $40 per barrel on Tuesday, poses a fresh and sustained threat to western Europe’s biggest petroleum producer.

But rather than continue with a cycle of pre-emptive rate cuts to mitigate the risks of an oil-induced crisis, Norway’s central bank should retreat to a wait-and-see mode to avoid running out of stimulus options, according to Commerzbank AG.

“The task for Norges Bank is to take monetary policy in a direction that’s better suited to a long period of low oil prices, of pressure on the economy and lower growth due to structural changes,” said Esther Reichelt, a currency strategist at Commerzbank in Frankfurt. “It would not be a good sign to the market if with every oil price decline they panic and cut rates.”

The plunge in Brent crude prices is driving the worst slowdown in oil and gas investments in Norway in 15 years, leaving the economy open to recessionary risks. The central bank has halved rates to 0.75 percent in the last year in an easing cycle filled with surprise decisions.

Policy makers have also signaled the possibility of more easing in the coming year. Unemployment has risen to 4.6 percent, the highest since at least 2006, as Norway relies on its oil sector for about 1 in 9 jobs. An indicator for aggregated output growth for six months ahead dropped to its lowest level since early 2009, according to the central bank’s regional network report.

Oil prices have now plunged to levels not seen since 2009 after the Organization of Petroleum Exporting Countries effectively abandoned its strategy of limiting production to control prices.

That development, along with fresh data showing that manufacturing in Norway has slumped, drove the krone down more than 2 percent against the euro at one point on Tuesday and to its lowest against the Swedish krona since 1992.

The central bank “will be even more interested in indicating to the market that they are going to remain on the expansionary side for quite some time to come,” Reichelt said.

While a weaker currency does help Norges Bank achieve its goals of stabilizing the economy, policy makers have “shown that they are more concerned about the real economic effect from low oil prices than they are positive about the krone weakening,” said Kjersti Haugland, an analyst at DNB ASA in Oslo.

She sees the central bank remaining proactive and cutting rates to 0.50 percent next week. “A fall in the oil price isn’t good news for Norway,” she said. “We expect Norges Bank to be more aggressive now and use their remaining ammunition pre-emptively.”

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