Norway Under Pressure to Cut Rates as Inflation Hits 3-Year LowBy
Consumer price growth has slowed to a 37-month low in Norway, adding pressure on its central bank to provide further monetary easing despite a red hot property market that is fueling concerns about the financial stability of western Europe’s biggest oil producer.
Underlying inflation, which is adjusted for energy prices and the direct effects of tax changes, came in at 2.1 percent in January, well below a Bloomberg survey estimate of 2.6 percent and Norges Bank’s own forecast of 2.7 percent for the first quarter. The krone slid 0.4 percent to 8.912 per euro as of 1:15 p.m. local time.
"The Bank is currently reluctant to respond, given concerns about the impact of very loose monetary policy on the housing market," Jack Allen, an economist at Capital Economics, said in a comment. "Given that inflation seems to be falling faster than the Bank had expected, we suspect that it will eventually cut interest rates.”
Norway’s central bank has reduced its key policy rate to a record low of 0.5 percent to fight off the worst downturn in a generation following a plunge in crude prices that started in 2014. While Norwegian exporters have benefited from a weaker krone, low rates have caused housing prices and household debt levels to surge to worrying levels.
The economy showed signs of recovery last year by posting a growth rate of 1.1 percent, as petroleum investments rose for the first time in 13 months, according to Statistics Norway. But employment levels remain sluggish, with labor force participation on the decline.
"We suspect Norges Bank has underestimated the degree of slack in the Norwegian economy – hence, underlying price pressures are probably weaker than expected," said Marius Gonsholt Hov, an economist at Handelsbanken.
The central bank, which targets an inflation rate of 2.5 percent, has held its benchmark deposit rate at the current low since February 2016. Its next rates announcement is on March 16.
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