DnB Nor sees rate cuts by ECB, Norges Bank, Sveriges Riksbank

DnB Nor Markets says in a report today that it believes the ECB, and central banks in Norway and Sweden will be forced to cut interest rates before the end of 2011 to combat the fallout from the ongoing eurozone crisis.

The immediate threat to the eurozone has shifted from Greece to Italy, where rumours swirl around a possible resignation of prime minister Silvio Berlusconi, whom DnB Nor notes is now identified by his own finance minster Tremonti as being the biggest obstacle to market faith in Italy’s ability to repay its €1.9trn sovereign debt.

“In light of the last week’s incidences and news, we have adjusted our interest rate forecasts. First, we expect that ECB and Mario Draghi will follow last week’s rate cut, by an additional cut of 25 bp at the next meeting in December. We are then back at the low level we had before ECB started to hike interest rates earlier this year.”

“Second, we expect that Norges Bank will cut back the rate by 25 bp to 2% on the upcoming meeting in December. We expect that this level will stand until second half of 2012. After that we think Norges Bank will increase rates by 50 bp in total towards the end of 2012.2

“Isolated we believe that the conditions in the Norwegian economy [point] to a somewhat higher interest rate. However, the turmoil in financial markets has been more persistent than previously assumed and economic activity at our trading partners has been lower than expected. The sum of lower activity and interest rates abroad explains why we believe that Norges Bank will keep the rate low longer than previously assumed.”

“Third, we expect that the Swedish Riksbank to cut the repo rate by 25 bp in December, and an additional cut of 25 bp in February 2012. The Swedish economy has proven to be more vulnerable to international fluctuations, and several industrial indicators has markedly fallen back lately.”

Norway’s interest rate predicament was thrust into the spotlight in September this year when the Swiss National Bank drew a line on further appreciation of the CHF against the euro. That tipped foreign exchange trading into other safehaven currencies such as the NOK and SEK.

Cutting interest rates in Norway would benefit the country’s exporters who are now struggling with a sharply appreciated currency. However, any cuts risk creating an asset price bubble around residential property, with annualised property inflation well into double digits in some urban areas.

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