Norway Becomes Squeamish Rate Cutter as Policy Heads to Unknown

  • Norges Bank will now be `careful' in setting rates ahead
  • Bank has still has room to manuever on monetary policy

Norges Bank Governor Oeystein Olsen decided to take a breather from easing just as the collapse in oil prices became even more dire.

The governor on Thursday kept rates unchanged at a record low 0.75 percent, a level he says has put the bank in “unknown territory” as it seeks to ward-off a recession amid collapsing crude prices. Having acted preemptively over the past year, he now says he will be “careful” in cutting rates further, citing a weaker-than-expected currency and financial stability.

That shows that he is “absolutely” reluctant to cut rates, according to Norway’s biggest bank. “There is a duality we have seen in the last year -- the central bank at its core is in a situation where home prices are increasing and debt burden is high, so it’s reluctant to trigger” further problems, said Kjersti Haugland, an analyst at DNB ASA in Oslo.

Olsen’s reluctance comes as his colleagues are either moving deeper into unknown territory or moving away from it. The U.S. Federal Reserve on Wednesday ended its zero rate policy after seven years, while the European Central Bank this month added to its stimulus program with rates practically at zero. The Riksbank in Stockholm, meanwhile, has cut rates far below zero and has unleashed a bond buying program of its own.

While Norges Bank lowered its rate path, which DNB says indicates a 100 percent chance of a cut in March and an almost a 50 percent chance of another cut in September, right now “financial imbalance considerations are outweighing the risks that the Norwegian economic outlook is weaker than they expect” because of oil prices, Haugland said.

The bank has halved rates in the past year as the oil-price collapse threatens growth in western Europe’s biggest crude producer. The bank said Thursday it sees “somewhat weaker than anticipated” growth. It forecasts mainland GDP at a quarterly rate of about 0.2 percent through 2018 as the impact of a slowing petroleum sector feeds into the economy.

At the same time, lower rates “could increase the risk of a more rapid rise in real estate prices and debt,” Norges Bank’s board said Thursday.

The decision to keep rates unchanged and signal a high probability of a rate cut ahead mirrors what the bank did in March, when it also held rates over concerns related to a hot housing market. Thursday’s decision came a month after Norway’s financial watchdog warned that record low interest rates are fueling excessive risk taking.

Norway’s housing market is cooling from a boom that has driven housing prices up about 80 percent over the past decade and pushed household debt levels to twice disposable incomes. Yet high debt growth has persisted, with the main driver being low rates, Morten Baltzersen, head of the financial regulator, said in a November interview.

Olsen maintains that the board hasn’t discussed the possibility of negative rates or quantitative easing as there is “still room to maneuver in monetary policy” and “the interest rate is our policy measure.”

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