Battered Krone Seen Triggering Earlier Norwegian Rate Increases
(Bloomberg) -- The beaten up krone could give Norges Bank greater leeway to signal an earlier exit from almost two years of record monetary policy stimulus.
While none of the 27 economists surveyed by Bloomberg predict the central bank will change its record low 0.5 percent benchmark interest rate on Thursday, policy makers in Oslo will probably suggest that an increase is moving closer.
As Norway’s economy recovers from the oil crisis, the central bank this year first abandoned talks of further easing in June and then in September suggested a small chance that rates could rise as soon as the end of 2018. Now a plunge in the krone -- which all else equal will drive inflation higher and boost exports -- could give it further room to damp stimulus.
“Norges Bank will assume a weaker krone for longer,” said Kyrre Aamdal, a senior economist at DNB ASA who sees a first rate increase in the first quarter of 2019 and then one more that year. “This will lift the rate path.”
Norwegian policy makers may also be given ample backing from their colleagues abroad to move toward the exit, with global central banks poised next year to kick off the biggest tightening of monetary policy in more than a decade. This week also sees the U.S. Federal Reserve, the Bank of England, the European Central Bank and the Swiss National Bank all announcing their final policy decisions of 2017.
Analysts at Nordea Bank AB, SEB AB and Svenska Handelsbanken AB also predict a higher rate path in Norway, taking into account a higher oil price and strengthening economic momentum.
"The main question before the December Monetary Policy meeting is how much weight Norges Bank will give to the weaker krone and lower unemployment, and consequently how much the rate path will be raised," Erik Bruce, an economist at Nordea, said in a note.
In September, Governor Oystein Olsen penciled in a small chance for an increase at the end of next year but said the bank didn’t expect to tighten before the summer of 2019.
Eager to move away from record low rates, Olsen and his team need to navigate their way through a series of mixed signals about the health of the Norwegian economy. Most indicators suggest that western Europe’s biggest crude producer is now looking at the oil crash through its rear-view mirror. The jobless rate has been steadily below 3 percent since March and a recent central bank survey showed that all industries now plan to invest more. However, the krone took a severe hit at the end of November following an unexpected drop in retail sales amid concern a downturn in the housing market will hurt consumers.
That may also explain the widening chasm between the krone and oil prices that’s been going on since the summer. While it can be interpreted as a welcome sign that government efforts to wean the economy away from oil are beginning to bear fruit, the decoupling is also sucking away at forecasters’ certainties.
Governor Olsen says the market shouldn’t worry too much about a potential housing bubble.
“Our view is that we can go for a soft landing here in terms of price developments, activity level in the housing market and the building and construction sector,” he said in a November interview in Oslo. In that same interview he also questioned the solidity of the krone-oil decoupling, arguing that history shows a strong long-term correlation between the two.
But one thing he will need to contend with is an inflation rate that is far below the 2.5 percent target. The core rate was at just 1 percent in November, below the bank’s 1.3 percent prediction. But Olsen has maintained he can ignore the short fall in price growth as long as expectations are anchored -- which they are.
SEB expects the bank could start raising rates as soon as Dec. 2018.
“Both economic and financial developments support an upward adjustment of the rate path,” said Erica Blomgren, an analyst at SEB in Oslo. “However, below-target inflation suggests that the bank is in no hurry to start hiking rates.”
©2017 Bloomberg L.P.