No more rate cuts from Norway – Handelsbanken

Norwegian interest rates will not go lower because the economy is doing better than the country’s central bank downside scenario, according to Handelsbanken Capital Markets, part of Sweden’s Handelsbanken.

Norges Bank cut its key rate 0.5% to 1.75% in December, and the bank’s current downside scenario suggests another 0.25% cut could be coming.

However, Handelsbanken said that “Norwegian producers seem to be faring better than both we and Norges Bank expected in December.”

“The Norwegian labour market is strong and stable and the development has been better than feared. Inflation is low and has been lower than Norges Bank expected in December.”

Adjustments to the central bank’s approach to inflation could also lead to higher rates, Handelsbanken said.

“According to governor Olsen’s annual address, inflation will no longer be given as much weight as before. Therefore, coming back to the inflation target is allowed to take longer, which implies a higher interest rate.”

“During the latest weeks, the [Norgegian] krone has appreciated strongly, we believe much due to a higher expected interest rate differential but also due to a high and increasing oil price. In isolation, we believe the strong krone should lead to a cut in the interest rate, but as the main krone effect on the interest rate is through inflation, we believe the effect will be muted.”

Handelsbanken said that the central bank’s next Monetary Policy Report is likely to give more weigh to financial stability than inflation, which should lead to a higher interest rate than otherwise would be the case. This bank concluded that the 1.75% interest rate will remain unchanged until it is raised to 2% in March 2013.

 

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