Norway Krone Soars as Central Bank Reveals Reluctance to Ease

  • Norges Bank governor says need to be careful going forward
  • Norges Bank sees rate remaining below 0.75% until 2018

Norway’s krone surged after the central bank signaled a reluctance to ease further as it monitors the effects of record low interest rates.

The krone rose as much as 1.4 percent against the euro after Norges Bank kept its benchmark rate unchanged at 0.75 percent. The decision was forecast by 13 of 20 economists surveyed by Bloomberg, while the rest had expected a cut to 0.50 percent.

The bank is in “unknown territory” after acting preemptively with three rate cuts,  Governor Oeystein Olsen said at a press conference. Taking into account financial stability, a weaker-than-expected krone and higher inflation there’s a need to be more “careful” going forward, he said.

Still, the bank signaled it’s prepared to ease further in the first half of next year to keep western Europe’s biggest crude producer out of a recession. The rate is seen as low as 0.39 percent in the fourth quarter next year and below today’s level until late 2018.

Olsen said another cut is “probable” in March.

Norges Bank has halved rates since the oil-price drop quickened more than a year ago in a bid to rescue an expansion. Oil prices this month fell to the lowest since 2008 in a renewed plunge. Today’s decision comes against the backdrop of the Federal Reserve’s much-anticipated rate increase Wednesday, which could ease pressure on smaller central bank’s that have been trying to keep their currencies from appreciating.

“Norges Bank has again turned much more pessimistic on the Norwegian economy,” Erik Bruce, a senior economist at Nordea Bank AB, said in a note. “The downward revision of the rate path is however moderated by a forecast for a much weaker krone.”

Nordea said the central bank will likely cut in March and September.

The impact of lower oil prices is feeding into Norway’s $500 billion economy. Mainland growth slowed to 0.2 percent in the third quarter and manufacturing production has fallen more than expected. State-controlled Statoil ASA, Norway’s biggest oil producer, is offering voluntary redundancy packages to all of its domestic employees. That will probably drive up unemployment, which is already at its highest level since at least 2006.

The central bank on Thursday predicted mainland gross domestic product will grow 1.1 percent next year and 1.9 percent in 2017. Petroleum investments will fall 11 percent next year and 6 percent in 2017. The bank sees unemployment at 4.6 percent next year and then falling to 4.4 percent the following year.

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