Research Team at ING, suggests that there is a room for 50bp cut – but oil price bounce probably means only 25bp will be taken up by the Norges Bank in its forthcoming meet.
Key Quotes
“If all you focus on is the dreadful macro data, then arguments for 50bp of easing look strong. But the recent bounce in the oil price means that Norges Bank (NB) will probably prefer to leave themselves room for further cuts, if that becomes necessary. Given that the market scaled down expectations of an imminent NB cut post the ECB March meeting and strong Norway Feb CPI, we expect NB easing (a 25bp cut) to weigh on NOK this week. Yet, we see NOK weakness as short lived, with the currency at valuation limits.
A casual stroll through the last month or two’s data for Norway makes for fairly harrowing reading. The world’s fourth richest country by per capita GDP saw growth decline by 1.2% QoQ in 4Q15, taking annual growth to only 0.1% YoY. Even mainland GDP, which excludes North Sea production, is stagnating.
Clearly, the collapse in oil prices since 2014 has taken its toll on Norwegian activity, with exports lurching lower. But the rot seems to be penetrating far deeper than one that can simply be ascribed to low oil prices alone.
Whilst Norway’s house prices look reasonable on a national basis (and have even been described as a bubble by some), national measures mask the fact that house price growth on the North-Sea dependent West Coast has slowed sharply. The total is flattered by prices for Oslo and its surrounds, which remain (for now) on a more solid footing.
Purchasing manager indices of activity remain deeply entrenched in contraction territory, whilst retail sales are stagnating and consumer confidence has plunged – hinting at further sales weakness to come.
If it were not for inflation running well above target at 3.1% YoY (the underlying rate, CPIATE, is also high at 3.4%YoY), we think the case for a 50bp cut would be quite strong. As it is, not only is inflation above Norges Bank’s target, helped higher by the recent NOK weakness, but the medium term outlook for the economy has been helped by the recent pick up in Brent crude spot prices. If oil prices do stabilise close to current levels, and this is a debatable point, or indeed, if they go higher, then a 25bp rate cut this month may mark the trough in the deposit rate at 50bp.
If not, then Norges Bank has left themselves with at least one more conventional rate cut to come before they too have to consider unorthodox policies like neighbouring Sweden. For now, we are taking an optimistic view.”
(Market News Provided by FXstreet)
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