Norway gets caught in currency race to bottom: Nordic Credit

Published Tue, Feb 17, 2015 · 11:58 PM
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[OSLO] Scandinavia's richest economy will need to keep cutting rates to stop its currency strengthening amid historic monetary stimulus elsewhere, according to some of the region's biggest banks.

Nordea Bank AB says Norway will probably cut rates in March and signal the possibility of another reduction after that. Svenska Handelsbanken AB estimates Norges Bank will be punished by currency markets if it doesn't deliver more easing. SpareBank 1 Markets A/S says Norway has already signaled rates need to come down to respond to quantitative easing in Europe.

"When central banks all around us are cutting rates and engaging in QE, it becomes difficult to keep the krone weak or weaken it without a rate cut," said Shakeb Syed, chief economist at SpareBank 1 A/S in Oslo. Governor Oeystein "Olsen is being clear that he will contribute to weaken the exchange rate, and that signals another interest rate cut." As western Europe's biggest crude oil producer, Norway is heading into what Olsen calls a "period of restructuring" triggered by plunging petroleum prices. A 46 per cent drop in Brent crude since a June high threatens to undermine the growth motor of an economy that relies on oil and gas for more than one-fifth of its output.

The key to softening that blow is a weak currency, Mr Olsen said in a Feb 12 speech. The comment was a "clear sign" that the bank will cut rates next month, according to SpareBank 1 Markets.

Norway may have little choice as central banks across most of western Europe deliver unprecedented stimulus measures that are devaluing their currencies as the region battles the threat of deflation. Sweden's Riksbank last week cut its repo rate below zero for the first time and unveiled a bond-purchase program. The European Central Bank starts its historic QE program next month.

Norway's central bank needs to cut rates to avoid strengthening the krone, said Marius Gonsholt Hov, an economist at Handelsbanken in Oslo.

"If they do not follow up on market expectations, they will get an appreciation in the krone, and they don't want to see that at this stage," he said.

Olsen said in December there was a 50-50 chance for another cut this year after he lowered Norway's main rate by 25 basis points to 1.25 per cent. The krone has lost 20 per cent against the dollar and 3 per cent against the euro over the past 12 months. It's also reversed losses driven by Olsen's December rate cut. While DNB ASA, Norway's biggest bank, doesn't see a rate cut until June, the stronger krone has added to the case for a reduction as early as March, it says.

For now, it's the "brisk growth" in the nation's house prices that will probably push the bank to keep rates at 1.25 per cent for a little longer, said DNB analyst Kjersti Haugland.


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