Norway interest rate hold stupefies economists / News / The Foreigner

Norway interest rate hold stupefies economists. Several financial analysts criticise Norges Bank’s decision, Thursday. The unchanged 1.25 per cent base rate has held off what would have been the Scandinavian country’s lowest-ever, of 1 per cent. Economists had expected the central bank to act today, though, what with oil price turbulence, a strong NOK, and property prices as they are currently.

interestrate, economy, bank, norway, oil, housing, inflation, unemployment



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Norway interest rate hold stupefies economists

Published on Thursday, 19th March, 2015 at 15:37 under the news category, by Michael Sandelson   .
Last Updated on 19th March 2015 at 18:06.

Several financial analysts criticise Norges Bank’s decision, Thursday.

Norges Bank main entrance
Handelsbanken's Knut Mork calls today's decision "a disaster for the Norwegian economy".Norges Bank main entrance
Photo: Norges Bank


The unchanged 1.25 per cent base rate has held off what would have been the Scandinavian country’s lowest-ever, of 1 per cent.

Economists had expected the central bank to act today, though, what with oil price turbulence, a strong NOK, and property prices as they are currently.

“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. So far, the effects on the real economy have been relatively small, and house prices are still rising at a fast pace. The key policy rate has therefore been left unchanged", said Governor Øystein Olsen in a statement.

He justified the bank’s decision by citing several factors such as inflation being near 2.5 per cent, and stable, if not lower than projected unemployment levels.

Weaker outlook

At the same time, Governor Olsen commented that the outlook ahead is somewhat weaker than anticipated in December, with continuing downwardly-drifting oil prices and perhaps even lower than assumed activity in the petroleum sector.

Wage growth in 2014 was also lower than projected, with expectations that these will rise less than originally forecast.  Several central banks have eased monetary policy in recent months, and the expected foreign policy rates increase “has been pushed further out”.

Nordea Markets’ Eirk Bruce tells business daily Dagens Næringsliv that the decision came as “a major surprise” to him.

“One might ask why the central bank did not cut at once. I have only one explanation: the intention is to draw the interest rate cut period out in time to keep the Krone weak. That’s my only answer. There’s no good reason why they shouldn’t cut [it] when they have such strong plans.”

Exchange rate rise

“I must say that I was very surprised,” chief economist Roger Bjørnstad at Economic Analysis Norway, a group of economists that perform analysis and consultancy work said to NRK. “I wonder if Norges Bank’s communication to the market may have been a bit poor. “The market has certainly been very surprised, and I think we 're going to see a stronger krone as a result of this.”

The NOK-EUR forex rose 0.25 øre following the bank’s announcement.

Handelsbanken economist Kari Due-Andresen comments in the institution’s daily statement that Norges Bank’s decision “was widely against our and market expectation.”

“There seems to be a wait-and-see explanation for this decision, as the path for the key policy rate has been lowered, much as we expected. The new path suggests that the key policy rate path bottoms out at 0.95 per cent, and implies that the key policy rate will be cut to 1.0 percent in May or June. The path further suggests a 15 per cent probability of another 25bp interest rate cut in December this year. A slow normalisation of interest rates is foreseen to start in Q4 next year, and the new interest rate path lands at 1.51 per cent in Q4 2018, implying a 50 per cent probability of the interest rate being raised to 1.75 in December 2018.”

“Lower credibility”

According to Ms Due-Andersen, property prices and a weaker NOK prevented a cut.

“We had expected Norges Bank to see through much of the NOK weakness as much of this could be explained by market expectations for a lower path for the key policy rate. House prices have furthermore showed signs of levelling out in recent month after adjustment for normal seasonal variation. Nevertheless, Norges Bank refers to the rising house prices as an important reason to avoid easing now. In our view, Norges Bank now shows a highly inconsistent reaction pattern, which may lead to lower credibility going forward,” she says.

Handelsbanken chief economist Knut Anton Mork calls today’s decision “a disaster for the Norwegian economy and Norwegian monetary policy,” reported NRK

Meanwhile, Handelsbanken think that the probability of an interest rate cut in May to be higher than 50 per cent.

“If economic developments ahead are broadly in line with that projected, there are prospects for a reduction in the key policy rate,” Governor Øystein Olsen said in his statement regarding the bank’s interest rate path.

“There’s 100 per cent probability that there will be a cut during the second quarter [of 2015],” Dagens Næringsliv quoted bank monetary policy rate director Birger Vikøren as saying at today’s press conference.

Norges Bank’s next key policy rate decision will be announced on 7th May.



Published on Thursday, 19th March, 2015 at 15:37 under the news category, by Michael Sandelson   .
Last updated on 19th March 2015 at 18:06.

This post has the following tags: interestrate, economy, bank, norway, oil, housing, inflation, unemployment.





  
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