Norway might cut rates again as oil plunges below $55

Norway might cut rates again as oil plunges below $55

6 January 2015, 09:13
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There is a growing speculation that the central bank of Western Europe's biggest oil producer will have to cut rates again, as oil dips below $55 a barrel.

The offshore industry of Norway has been pressured by a 54 percent plunge in Brent prices, as oil and gas compile 22 percent of the country's gross domestic product.

Within the same period the krone has lost about 20 percent against the dollar and 8 percent against the euro. The OBX benchmark stock index is down about 12 percent.

Earlier, the central bank delivered a surprise rate cut which was triggered by plunging crude prices. Since that time the oil price development has proven even worse than the central bank anticipated. Governor Oeystein Olsen said in yesterday's interview $55 oil is “clearly lower” than expected in December.

At Norway’s biggest bank, DNB ASA, economists say Olsen will need to reduce rates again in June from 1.25 percent. “The weaker krone buys Norges Bank some time before they make another cut,” Kjersti Haugland, an analyst at DNB, said by phone.

After lowering rates for the first time in almost three years on Dec. 11, Olsen said he sees a “50-50 chance” of more easing this year. Nordea Bank AB, Scandinavia’s biggest bank, says that means another two reductions, bringing the benchmark deposit rate to 0.75 percent.

The central bank, which also oversees Norway’s $850 billion sovereign wealth fund, plans to provide more detail on how oil prices will shape its policy in March, Olsen said.

As Olsen specified in his Dec 12 interview, Brent crude will need to trade above $70 a barrel before pressure on monetary policy abates. Since then, the price of oil has dropped 14 percent to its lowest level in more than five years.

However, because of a weaker krone, Norway is one of the few places in Europe that isn’t facing the specter of deflation. Annual consumer prices in Scandinavia’s richest economy, adjusting for taxes and energy, probably reached the central bank’s 2.5 percent target last month, according to a Bloomberg survey of economists.

Olsen signaled last month he may be willing to tolerate faster inflation for a time.

“We expect that inflation will accelerate and for a period lie above the inflation target - largely because of a significant weakening of the krone - and then return toward the target,” he said.

Declining crude prices haven’t produced “any drama” in the labor market so far, Olsen said. A report showed registered unemployment rose to 2.7 percent in December from 2.6 percent the previous month.

“We keep the view that we have presented, that unemployment will gradually rise,” he said.

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