Today, Norges Bank slashed rates by 25bp. The new interest rate path suggests a 50% probability of another rate cut before June. The rate path is based on an assumption of mainland GDP growth of 1.5% in 2015, which is marginally lower than we expected (1.75%) but far from a crisis scenario. Keep in mind that the rate path is also based on an assumption that the import-weighted NOK will appreciate by roughly 4% in H1 15.
The main reason behind the rate cute then seems to be ‘pre-emptive’, i.e. to ensure against a more severe downturn in the Norwegian economy in coming years. In the MPR, Norges Bank states that:
‘Developments in the Norwegian economy ahead are shrouded in uncertainty. There is a risk that developments will be considerably weaker than currently envisaged. An early reduction in the key policy rate could reduce the level of uncertainty and counteract the risk of a pronounced downturn in the Norwegian economy. This robustness consideration suggests a lower key policy rate at the beginning of the forecast period.’
As the persistence of the low oil price is highly uncertain and the effects of the lower prices on the economy are correspondingly so, we think the probability of further rate cuts will be very data-dependent in the first half of next year.
We recognise the increased downside risk to the economy from lower oil prices, lower oil investments and reduced activity in the oil-related sectors.
To Read the Entire Report Please Click on the pdf File Below