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Even the Richest Nordic Economy Isn’t Giving Up Monetary Support

Mikael Holter
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Even the Richest Nordic Economy Isn’t Giving Up Monetary Support

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In Scandinavia’s richest economy, the central bank used to stand out for its determination to raise interest rates. Now, Norway seems about as reluctant to unwind monetary support as others.

All 30 economists surveyed by Bloomberg expect Norges Bank to keep its benchmark deposit rate at 1.5%, when policy makers announce their decision on Thursday. Forecasters who have penciled in a rate hike for later this year are now less convinced it will materialize.

Western Europe’s biggest oil and gas producer ended its tightening cycle last September, after raising rates four times in the course of a year. Back then, policy makers wanted to ensure that a rebound in petroleum investment didn’t lead to overheating.

But with its reliance on international trade for economic growth, Norway has had to acknowledge that it can’t ignore global trade tensions. As a result, the central bank is adopting a much more cautious stance to guide its exports through uncertain times.

Danske Bank is still advising clients to expect a Norges Bank hike in the second quarter. But, “The probability of this call materializing has arguably fallen in recent weeks,” it said in a note on Jan. 15.

Norges Bank kept rates unchanged in December, and said there would probably be no hikes for the foreseeable future. But buried deep in its forecasts, economists were surprised to note that the central bank still saw a 40% probability of a hike in 2020.

The few economic indicators to have been published since December have tended to be weak. The statistics office’s industrial-confidence indicator fell further in the fourth quarter, and a manufacturing survey declined faster than expected.

“Even if we do not expect any big decline or major negative spillovers, this development clearly confirms our view that economic growth is past the peak,” Swedbank AB said in a client note. “Slowing GDP growth confirms our view of no more rate hikes from Norges Bank.”

Political Turmoil

Thursday’s rate decision won’t include a monetary policy report or press conference. It’s the first rate announcement that will be made by Norges Bank’s new Monetary Policy and Financial Stability Committee. The group of five, headed by Governor Oystein Olsen, was set up to free the bank’s executive board to focus more on the management of Norway’s vast sovereign wealth fund, which is now worth about $1.1 trillion.

The rate decision coincides with a spell of political uncertainty in Norway. Prime Minister Erna Solberg, who leads the Conservative Party, this week lost her majority when her main ally, the populist Progress Party, left the government. While the move is likely to make governing harder, the news had little market impact on Monday.

To contact the reporter on this story: Mikael Holter in Oslo at mholter2@bloomberg.net

To contact the editor responsible for this story: Tasneem Hanfi Brögger at tbrogger@bloomberg.net

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