We’ve long said the Norges Bank would ease in March in the face of falling crude prices and the continuation of the negative rates regime at the ECB, the Riksbank, and the NationalBank.
Indeed by the time of today’s announcement, the market was pricing in a ~75% chance that Oystein Olsen would cut rates by 25 bps. And he didn’t disappoint, slashing the depo rate to 0.50%. Incidentally, we’d hate to be the 1 economist out of 20 surveyed by Bloomberg that managed to miss this one.
The picture in Norway is clouded by a number of factors.
Obviously, the economy is heavily dependent on oil, and the sharp decline in prices has taken a significant bite out of revenue. At the same time, falling crude has also put pressure on the NOK, which has naturally adjusted downward with oil, providing somewhat of a cushion for the country’s economy.
Still, there are two factors that prevent the currency from adjusting as much as it otherwise might: 1) competitive easing from the ECB, the Riksbank, the NationalBank, and 2) the fact that when Norway taps into oil revenues to provide fiscal stimulus to the economy, the Norges Bank becomes a buyer of NOK. We explained the latter dynamic in detail here, but suffice to say that in February, the bank bought 900 million kroner per day, a marked increase from previous purchases. Here are two simple graphics which show that when the budget deficit began to catch up with oil revenues, the Norges Bank began buying NOK:
As Bloomberg put it last November, there’s a certain extent to which the krone “just can’t get weak enough.” And if it did, it’s not yet clear what effect that would have on the country’s housing bubble and on financial stability in general.
By the time the March decision rolled around it was pretty clear that "financial system vulnerabilities" - as the central bank puts it - would have to take a backseat to concerns about the economy and worries about what effect Draghi's new package of easing measures would have on EURNOK. Further, the Riksbank also cut rates again last month, putting still more pressure on the Norges Bank. Oil prices have rebounded thanks to incessant banter about an output freeze led by Saudi Arabia, Russia, and Qatar, but the outlook is hardly encouraging and as we've outlined on a number of occasions, Norway will this year be tapping the rainy day SWF (which, at $830 billion, is the largest on the planet) to help plug budget holes and provide stimulus to the economy.
And so, cut they did and an effort was made to send a dovish signal to markets. “The current outlook for the Norwegian economy suggests that the key policy rate may be reduced further in the course of the year," Oeystein Olsen said. The Norges Bank also said it "will not exclude the possibility of negative rates."
Meanwhile, the bank revised lower its estimates for oil investment which is now seen declining by 12% in 2016, by 75 in 2017, and by 2% in 2018. The 2016 GDP growth forecast was cut to 0.8% from 1.1%.
"[The] rate path is more dovish than expected," said Erica Blomgren, SEB’s Norway chief strategist. "[The] determination to support growth through weaker krone suggests that bank will be forced to cut rates again."
Yes it does, and all things equal, all of the above would certainly suggest that the NOK should be getting some respite. But as explained above, all things in this case are not equal which is why in the aftermath of the cut, the NOK gained against all G-10 currencies except the NZD. How is that possible you ask? Well for the reasons outlined above. "There’s appreciation pressure from Norges Bank NOK purchases, stabilizing oil price and attractive valuation; should the government decide to increase fiscal stimulus it will increase further," SEB's chief FX strategist told Bloomberg. "[The] policy decision was dovish but the market obviously was very long EUR/NOK into the announcement."
In other words, Norway has fallen behind in the currency wars and in a world where Draghi is buying corporate bonds, Kuroda pontificates daily about his "three forms," and Janet Yellen is leaning dovish, a 25bps cut to positive 0.50% and a hint that more cuts are coming doesn't even come close to being competitive. Especially when you are buying your own currency hand over fist to support fiscal stimulus.
So good luck Norway because really, there's no way out of this one.
And for the final punchline, note that Olsen says he's "not considering QE right now." Well that's good, because there's nothing to buy: