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The Richest Nordic Economy Can’t Afford More Central Bank Hikes

Pictures from downtown Oslo, Norway. A man walks by the central bank of Norway, home to the The Government Pension Fund of Norway, a stabilization fund that may be the world's largest sovereign wealth fund. (Photo: Bloomberg / Kyrre Lien)

After raising interest rates well before its peers, Norway now has grounds to be a lot more cautious.

The richest economy in the Nordic region will probably shelve a tightening cycle that produced three rate hikes last year. With Norges Bank’s benchmark deposit rate currently at 1.5%, economists say the possibility of more next year seems less likely than ever.

Policy makers in Norway, who will announce their next rate decision on Thursday, will be in “snooze mode,” said Erica Dalsto, chief strategist at SEB in Oslo.

“The anticipated slowdown in mainland GDP and employment will likely be a bit more pronounced than envisaged in September, and the output gap might close a bit earlier,” Dalsto said. “Hence, domestic factors and underlying drivers for inflation suggest the need for further rate hikes is small.”

The probability for a new hike in 2020, already slim, is now disregarded by all but two of the 15 economists surveyed by Bloomberg. Norges Bank will keep rates on hold on Thursday, according to a unanimous survey.

Western Europe’s biggest oil exporter had long been free to ignore much of the turmoil that forced others to rely on record monetary stimulus. Backed by the world’s biggest sovereign wealth fund, Norway has pumped out much more fiscal support than its European neighbors.

Unlike neighboring Sweden and Denmark, Norway never experimented with negative rates. Nor did it ever try out unorthodox measures like quantitative easing.

Central banks that ventured below zero are now showing increasing signs of unease with the policy. In Sweden, the Riksbank is expected to end half a decade of subzero rates this week, as the bank traces a path toward more normal policies even though inflation is below its target.

Sweden has made clear that a hike to zero probably won’t be followed by more tightening in the near term. In Norway, central bankers have had to scale back their once hawkish ambitions to adapt to the uncertain global economy.

At Danske Bank, economists are telling clients to prepare for a “protracted period with unchanged rates” in Norway. Handelsbanken economists say the central bank will signal that the peak of the hiking cycle has “presumably been reached.”

To contact the reporter on this story:
Mikael Holter in Oslo at [email protected]

To contact the editor responsible for this story:
Tasneem Hanfi Brögger at [email protected]

© 2019 Bloomberg L.P.

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