Norway Seen Signaling Rate Cut as Sub-$40 Oil May Halt Growth

  • 13 of 20 economist surveyed see rates on hold on Thursday
  • Bank to indicate `high probability' of cut in March: Danske

As the oil price rout has reached a new level of grimness, the question is whether the central bank of western Europe’s biggest crude producer will cut rates Thursday or lay in wait until early next year.

Norges Bank is closing in on the lower bound in rates after a series of preemptive cuts over the past year brought its benchmark to a record low of 0.75 percent. Now 13 of 20 economists surveyed by Bloomberg see the bank keeping rates unchanged in a decision scheduled for release at 10 a.m. The rest predict a 25 basis point reduction.

While the bank may continue to “quickly reduce rates to get ahead of the curve” it will probably refrain from easing now, said Erlend Loedemel, chief economist at Arctic Securities. It will likely wait until March to cut since “most of the oil price plunge happened more than a year ago, so there’s no reason to expect the economy to suddenly cave in."

Brent crude, which in the last few days has flirted with levels not seen since 2008, has fallen about 33 percent this year, threatening to halt growth in a country in which one out of nine jobs depend on oil. The collapse in prices has triggered the worst slowdown in oil and gas investments in Norway in 15 years, leaving the economy open to recessionary risks.

The central bank will signal “a very high probability” of a cut in March, said Danske Bank A/S, which described its prediction for unchanged rates this week as “tentative.”

Norges Bank in September lowered rates and left open the possibility of more easing ahead. Data since then has shown the economy may need that support: Unemployment is at its highest level since at least 2006, manufacturing production is falling and the production outlook ahead is the weakest since 2009.

Oil companies are feeling the impact. Dolphin Group ASA, a Norwegian seismic surveyor, filed for bankruptcy on Monday, while state-controlled Statoil is now offering voluntary redundancy packages to all of its Norway-based employees.

The drop in oil has had one welcome effect: a weaker currency. The trade-weighted krone average so far this quarter is about 3 percent weaker than policy makers expected in September, easing the need for a rate cut. The drop in the currency pushed underlying inflation to 3.1 percent last month, well above the bank’s 2.5 percent target.

While a weaker krone has so far helped key parts of the economy, its positive effects may be wearing off.

“Export growth expectations for the non-oil parts of the economy have come down quite substantially,” said Marius Gonsholt Hov, an economist at Svenska Handelsbanken AB in Oslo. “That means the weak krone does not give the same kind of support for economic growth that we hope for.”

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