Norwegian banks warn of interest rate hikes

Norway’s central bank may announce higher interest rates tomorrow – even as the country’s banks have started charging each other higher interest rates to lend in light of the uncertainties sparked by the ongoing financial crisis in Europe.

“The international instability over time will hit Norwegian customers. The increased risk that has hit capital markets means that our financing costs more, but how big the rate increase will be for customers is impossible to say currently,” said Bjørn Erik Næss, finance director at DnB Nor to Dagens Næringsliv.

It cites Shakeb Syed, chief economist at Sparebank 1 Markets, suggesting that Norway will be hit harder than other Nordic markets such as Sweden, because it is more exposed to risks in the banking sector.

Most banks lend money long term, for example in the form of mortgages. At the same time they engage in short term borrowing through the money market. If the money market dries up it has big consequences for the banks.

Syed points out that the earlier financial crisis led to sharply higher interest rate increases in Norway than in Sweden.

“We are automatically more exposed to the international money market than many other countries, because Nordic banks can borrow in dollars,” Syed said.

Central bank hike

Norges Bank, the country’s central bank, is tipped to officially announce an interest rate hike on Wednesday 10 August. This has been noted in currency markets, where recently the NOK has gained strength along with the CHF.

Erica Blomgren, Fixed Income Strategist at SEB, yesterday tweeted: “Market is discounting approx 50% probability for a rate hike while Norges Bank’s rate path (from June) attaches 100% likelihood.”

Oil price drop

More costly financing is not the only blow facing Norwegian investors. It is reported that the price of North Sea oil – Brent crude – dropped below $100 per barrel in trading in Asia earlier today. This is seen as a consequence of commodities investors shifting out of oil and into gold, particularly after S&P’s downgrade of the US.

This will have a direct consequence on Norway, as one of the world’s biggest exporters of oil and gas, as well as on its sovereign wealth fund, with around $600bn worth of assets. These assets have been purchased predominantly with the profits from the oil and gas industry.

Somewhat ironically, even as the dollar price of oil was falling yesterday, 8 August, domestic oil giant Statoil announced confirmation of a major new  find of up to 400m barrels offshore the Norwegian coast. Even at the lower $100 price, that would be worth a theoretical $40bn.

That has not been enough to prop up the stockmarket, however. As Blomgren tweeted this morning: “NOK is holding up really well considering the plunge in OBX, stock market down almost 25% last 2.5 weeks.”

 

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