Late last month, the Norges Bank joined the global easing bonanza [12], surprising a slim majority of economists by cutting the overnight depo rate to a record low of 0.75%.
Norway, like Sweden and Denmark, is in a pickle. You can’t very well lean hawkish in a world of DM doves unless you plan on losing the global currency war and undercutting your inflation target, but then again, something has to arrest the inexorable rise in housing prices lest the risks to financial stability should outweigh any perceived benefits from keeping rates glued close to zero lower bound (or below).
If you’re Norway, the problem is complicated immeasurably by plunging crude prices.
Here’s what Goldman said after the Norges Bank’s latest rate cut:
Norges Bank adopted something close in line with our alternative scenario, whereby the fall in oil prices was seen as materially affecting the economic outlook (via weaker offshore oil investments) and the recent upside surprise to inflation was seen as more transitory, resulting in a cut and the adoption of a dovish policy rate path.
And here’s a bit from the Norges Bank itself on the housing bubble:
“[We’re] aware that lower rates could fuel the housing market.”
Put simply, it’s an impossible balancing act, and Thursday’s uber dovish Draghi presser didn’t do anything to help the situation.
While the slump in oil has pressured the krone and thus helped the country preserve some semblance of export competitiveness, the fact that i) everyone else is easing, and ii) global demand and trade are in the doldrums, serves as a kind of counterweight, leading directly to a situation wherein the currency, in Bloomberg’s words, “just can’t get weak enough.”
Now, Svenska Handelsbanken is out predicting that “lower for longer” crude will eventually force Norway to cut rates to zero.
Here’s more, via Bloomberg [13]:
With oil prices still wobbling around $50, Norway is in danger of a recession that could drive its benchmark interest rates, already at a record low, to zero.
That’s what economists at Svenska Handelsbanken AB in Oslo say as they warn that “recessionary risks are significant.” The central bank in September cut rates to 0.75 percent and signaled more than a 50 percent chance for a third reduction since the drop in oil prices accelerated, about a year ago. Handelsbanken sees three cuts next year, bringing the benchmark to zero by the end of 2016.
“The Norwegian economy will now experience a deeper downturn than during the financial crisis, with output expected to stay below its potential for longer than it did last time,” Kari Due-Andresen and Knut Anton Mork, economists at Handelsbanken, wrote in their latest report.
[14]
Before the big oil price drop even got started, Norway was already battling a bigger-than-expected fall in investments. Now, with Brent crude lower still, investments by oil and gas companies operating in Norway are set to suffer.
As a reminder, Norway is now set to dip into its sovereign wealth fund for the first time. Earlier this month, budget estimates indicated that inflows from petroleum activities in 2016 will fall short of what the government plans to take out of the fund by nearly NKr4 billion. Here's a graphic from RBS which illustrates the relative size of Norway's SWF:
[15]
And while the asset allocation of SWFs varies meaningfully compared to official FX reserves, it's worth noting that this is but one more example of "Great Accumulation" reversal dynamic outlined [16] in thse pages last November and highlighted by Deutsche Bank [17] in the wake of the China deval. That is, regardless of what's being sold, it still represents a major turning point at which crude producers cease to be net exporters of capital.
Getting back to the Norges Bank, it's also worth noting that just today, Governor Oeystein Olsen mentioned NIRP. As reagular readers are no doubt aware, there's no surer sign that policymakers are in fact considering something than when they say they aren't considering it. The soundbite, from Bloomberg:
"We still have room to maneuver both ways. I hasten to stress that as prospects are now, we think it’s not likely in the near future that Norway will have negative rates. The board has not discussed moving into negative territory”
In the end, we suppose the real question is this: if the housing bubble that the Norges Bank has helped to inflate bursts, how does the central bank plan to deal with the fallout (which will be amplified by the economic drag from low oil prices) when it has exhausted its counter-cyclical capacity by cutting rates to zero?
