Norwegian rate surprise takes on FX speculators

Norges Bank’s surprise interest rate cut of 0.25% to 1.5% today signals a possible war with currency speculators, said Handelsbanken Capital Markets.

While welcomed by certain sectors of the Norwegian economy, according to comments carried in local press such as Dagens Næringsliv, the change was also criticised for coming unexpectedly after a number of statements suggesting the central bank would leave rates unchanged through the remainder of 2012.

“We and consensus had expected an unchanged policy rate at 1.75%,” said Handelsbanken in a note.

“The new baseline for the key policy rate is at the most 138 bp lower than the baseline from October, and is even lower than the downside scenario from October. The main reasons for the surprisingly large downward revision of the interest rate path is lower inflation, both through lower wage growth and a stronger krone, lower domestic demand, lower growth abroad, lower interest rates abroad and higher money market spreads. Although we had expected these factors to be revised downward, we thought that the unexpected 50 bp cut in December had accounted for them. The only thing pulling the interest rate path upwards this time is Norges Bank’s judgement. They have chosen to put explicit weight in financial stability this time, which in itself pulls the interest rate up by some 50bp.”

The scale of the surprise is emphasised by the morning note from DNB Markets, which today said there would be no interest rate change.

“We think Norges Bank will keep policy rates unchanged this time and keep rate stable during this year,” the note said.

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