Oil Rebound Seen Lifting Norway’s Rate Outlook as Brexit Looms

  • 14 of 15 economists see rate unchanged at record low of 0.5%
  • SEB, Swedbank, Danske say bank could raise its rate path

Norway’s central bank is seen lifting its rate outlook as massive fiscal and monetary stimulus looks to have saved the economy from a recession. A vote for a so-called Brexit in the U.K. could unravel even its best laid plans.

Policy makers in Oslo will on Thursday -- the same day as the U.K. votes on its future in the European Union -- keep their benchmark rate unchanged at a record low of 0.5 percent, according to 14 of 15 analysts surveyed by Bloomberg. They are expected to nudge up their outlook for rates amid signs the economic slump has bottomed out, according to economists at SEB AB, Swedbank, Danske Bank and Handelsbanken.

“Economic data show a momentum of growth, the Norwegian economy has bottomed out and will improve”, said Erica Blomgren, chief strategist Norway at SEB AB. She expects the short-end of the rate path to be lifted to at least erase the 20 percent probability for the key rate to go down to zero.

Governor Oeystein Olsen last week signaled he was “relatively optimistic” on the state of the economy as the price of oil has rebounded by about 70 percent since a low earlier this year. While indicating he stands ready to cut further, even into negative if needed, he also said that more caution is now needed as rates approach zero.

Norway, which has accumulated $850 billion in its sovereign wealth fund, has unlike its neighbors been able to avoid negative rates and unconventional monetary policies amid massive fiscal stimulus and a weakening krone. The government is spending a record amount of its oil wealth to counteract a slowdown. Norway is Western Europe’s biggest oil producer and the biggest exporter of gas to the U.K.

"We believe that the bank may nudge upwards its rate path in the short-end, to buy some time to assess further developments in the economy, in particular the housing market," Handelsbanken also said in a June 20 note.

In its latest forecast from March, the central bank predicted its key rate would fall as low as 0.2 percent early next year and not reach above the current level until the second half of 2019.

Harald Magnus Andreassen, chief economist at Swedbank, also said the bank could lift its rate path because the economic sentiment has improved, while pushing a potential rate increase further into the future.

"It is important to differentiate between the oil and non-oil sectors of the Norwegian economy,” he said. “The non-oil sector of the economy took the greatest blow during the financial crisis and led to a greater downturn than what we now observe. Today, it is the oil and oil related industries that have taken a punch. It could have been worse.”

The central bank is seeking to strike a balance between sluggish growth coupled with a booming property market and an accelerating build-up of household debt. Given the rock bottom rates abroad, the central bank has little room to maneuver higher in its monetary policy without boosting the krone.

Kyrre Aamdal, a senior economist at DNB ASA, said it will likely be “status quo” for the bank at the meeting on Thursday even as it may also signal that it can dig further into its toolbox to respond to disruptions from a potential Brexit. DNB has said the krone could very well decline should the Brits vote to leave the EU.

“The bank may comment on a potential Brexit during the upcoming meeting,” he said. “We expect increased market volatility subsequent to a potential leave, and the central bank may prepare for further stimulus if necessary.”

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