Norges Bank surprise triggers new EUR/NOK forecast

by: Georgette Boele

  • Norges bank surprises financial markets by cutting rates to 0.75%…
  • …and leaves the door open for another reduction
  • We now expect one more rate cut this year…
  • ..and we have adjusted our EUR/NOK forecasts to reflect this change in view

Today, the Norges Bank reduced interest rates by 25bp to 0.75%. This surprised financial markets as the market consensus was for no change. This cut comes earlier than we had expected. Our view was for a rate cut later in the year.

In its statement Governor Olson had said that “growth prospects for the Norwegian economy have weakened, and inflation is projected to abate further out. Therefore the board has decided to lower the key policy rate now. Growth in the Norwegian economy is likely to remain low for a longer period than projected owing to the fall in oil prices through summer. The current outlook for the Norwegian economy suggests that the key policy rate may be reduced further in the coming year”.

Growth remains a priority for the Norges Bank but it would like to avoid a sharp weakening of the krone, because pass-through effects on inflation. Our energy analyst expects oil prices to recover in the coming months. Our year-end target for Brent oil prices is USD60 per barrel. It is likely that this recovery in oil prices will only work through the economy next year. Still in the short-term,  a weak economic backdrop will likely prompt the Norges Bank to cut rates one more time.

Therefore, we now expect one more rate cut by the Norges Bank this year to support the economy. The krone has a tendency to move in tandem with oil prices. A recovery in oil prices could therefore support the krone and dampen the effect of another rate cut on the krone. We have adjusted our year-end forecast in EUR/NOK to reflect the above-mentioned dynamics and see a bit more krone-weakness than we had expected. Our new year-end forecasts for EUR/NOK for 2015 and 2016 are 9.50 (9.00) and 8.50 (8.00) respectively.