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No cut in rates, krone rebounds

UPDATED: Norway’s central bank defied the expectations of analysts and economists on Thursday, with its board opting against another cut in its key lending rate. Norway’s currency, the krone, immediately strengthened, reversing a decline that had been going on all week. Economists were surprised, and not pleased.

After the speech was over, a smiling Olsen was host for the banquet that always follows the speech.  PHOTO: Nils S Aasheim/Norges Bank
Norway’s central bank boss Øystein Olsen surprised analysts, economists and the media again when he announced Thursday that interest rates would not be cut once again. He’s seen here heading into the bank’s annual banquet that followed his yearly address in February PHOTO: Nils S Aasheim/Norges Bank

“This is a catastrophe!” Knut Anton Mork, chief economist at Handelsbanken Capital Market, exclaimed to website Mork claimed that a stronger krone is “the last thing Norway needs now,” and he thinks the central bank’s failure to lower rates will damage the Norwegian economy. “Excuse the expression, but they (bank officials) are saying some stupid things about how the low oil prices haven’t hit hard yet,” Mork added.

A stronger krone will make Norway’s much-needed transition to a less oil-reliant economy much harder, Mork claimed. Other economists were also surprised, even stunned, by the lack of a rate cut, but not as harsh in their assessment as Mork.

‘Small effects’ of lower oil prices
Central bank boss Øystein Olsen cited “relatively small” effects of lower oil prices on the Norwegian economy and noted that housing prices “are still rising at a fast pace.” The bank’s board therefore decided to keep its key policy rate at 1.25 percent, unchanged from the last cut announced in December.

“The key policy rate was reduced in December to counter the risk of a pronounced downturn in the Norwegian economy on account of lower oil prices,” Olsen said in a prepared statement released Thursday morning. The “pronounced downturn” has not materialized, according to the bank, leading the bank’s board to see no need for another rate cut to stimulate the economy right now.

Instead, developments in the Norwegian economy were described as being “broadly in line” with what Norges Bank had projected in its monetary policy report for December. Inflation is running at around 2.5 percent, Olsen noted, and unemployment has remained stable and been “slightly lower” than projected.

Outlook ‘somewhat weaker’
At the same time, the bank board stated, “the outlook is somewhat weaker than anticipated in December.” Oil prices have continued to “drift down” and activity in the oil and gas sector may also decline “to a further extent than assumed earlier.” Wage growth was lower than projected in 2014 and prospects for wage growth this year are also low.

The bank also noted that central banks in several other countries have cut rates, but Norges Bank isn’t going along at present.

“If economic developments ahead are broadly in line with that projected, there are prospects for a reduction in the key policy rate,” Olsen stated, hinting once again at a future rate cut, but not now. The bank seemed particularly concerned that cutting its key lending rate would stimulate the one sector that many view as too hot already, the housing market. Housing prices and debt levels have continued to gallop in Norway, to a point that led to regulators urging the government this week to take unwelcome steps to cool things off.

Surprise, surprise
The bank’s failure to cut rates clearly surprised the analysts, economists and not least Norwegian media, all of whom expected another quarter-point cut to an historically low 1 percent. There were many reasons for their expectations of another cut: When Olsen announced the bank’s last interest rate cut of a quarter-point in December, he had said there was a “50-50 chance” that another would come in March. Economists believe there’s been little economic development since December, and thought the bank would cut rates to help offset that weakness.

“It seems as though housing prices have stuck in the brains of the central bank,” complained Mork of Handelsbanken Capital Markets. “It seems they haven’t realized that housing prices have flattened out in recent months, at least when you look at the seasonally adjusted numbers.” Kjersti Haugland, senior economist at DNB Markets, was also “very surprised” by the bank’s decision not to cut the key lending rate, and raised questions about the bank’s communications. Fully 13 macro-economits questioned by wire service TDN Finans had expected a quarter-point cut on Thursday, given the signals coming from the bank.

Olsen also has said, for example, not least in his closely watched annual address last month, that it’s important for Norway to follow the monetary policy of the countries around it. Both Sweden and Denmark, for example, have lowered their interest rates to levels so low that they’re considered negative.

Norway proved itself once again to be annerledesland (different from other countries), with Olsen bucking the tide. Haugland of DNB wasn’t as harsh as Mork, though, telling that she thinks the central bank made a “good” evaluation of the economy. “The krone is still weak in relation to where it historically has been,” she noted, “and housing prices have risen very strongly, yet the economy isn’t showing very strong signs of weakness.”

The Norwegian krone had weakened throughout the week, probably in anticipation of an interest rate cut, and on Thursday morning it took nearly 8.4 kroner to buy one US dollar. Within minutes of Olsen’s announcement, Norway’s currency strengthened and was trading at NOK 8.13 against the dollar. Within an hour it only took NOK 8 to buy a dollar. Berglund



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