Norway Put Interest Rates On Hold

As expected the Central Bank of Norway’s Executive Board decided Wednesday to keep the key policy rate unchanged at 1.75%. The interest rate forecast for the rest of 2010 is on average 0,25 percentage point below the forecast in the October Monetary Report. For both 2011 and 2012 the interest rate path is 0,5 percentage point lower. The main contributor to the downward shift is lower interest rates abroad and a stronger currency.

“In general the economic picture is weaker. Capacity utilization in the Norwegian economy is reported to be lower and inflation is expected to fall somewhat more during 2010 than assumed in the Report published in October 2009.”

Kyrre Aamdal

The market had priced in roughly 50 per cent probability for a rate hike and thus 3m NIBOR fell 4 bps and EUR/NOK edged up. At the moment EUR/NOK is up 0.2% from Wednesday morning. Norwegian stocks fell 0.35% yesterday, but increased after the Central Bank’s meeting. Stocks continues to climb Thursday.

The EUR/NOK increased only modest after Norges Bank’s MPC-meeting yesterday.

The market were obviously more concerned about the Portuguese debt downgrading, pushing the EUR/USD substantially lower.

According to Senior Economist Kyrre Aamdal at DnB NOR Markets, the market had priced in roughly 50 per cent probability for a rate hike, thus the 3m NIBOR fell 4 bps and EUR/NOK edged up.

At the moment EUR/NOK is up 0.2 per cent from yesterday morning.

In the Central Bank’s Monetary Policy Report 1/2010 the interest rate forecast is revised downwards from the previous report in October.

“The new forecast implies 25 basis points hikes in each of the meetings in May and in September. After that, there is a 50/50 chance of a hike in the meeting in December or in the meeting in February. These assessments were also confirmed from Norges Bank yesterday,” Aamdal writes in an research note Thursday.

The new policy interval is a quarter percentage points higher than in the previous period, and states that the Central Bank intend to keep the key policy rate in the interval between 1,5 and 2,5 per cent in the period from now to the publication of the next Report on June 23.

The interest rate forecast for the rest of 2010 is on average 0,25 percentage point below the forecast in Monetary Report 3/2009.

For both 2011 and 2012 the interest rate path is 0,5 percentage point lower.

The main contributor to the downward shift in the interest rate forecast is lower interest rates abroad and a stronger NOK. In addition, lower estimates for wage growth in 2010 and 2011 and lower-than-expected demand contributed to lowering the interest rate path.

“In general the economic picture is weaker. Capacity utilization in the Norwegian economy is reported to be lower and inflation is expected to fall somewhat more during 2010 than assumed in the Report published in October 2009,” Aamdal points out.

The forecast for GDP mainland is revised down by 0,25 percentage points in both 2010 and 2011, to 2,25 and 2,75 per cent respectively. The output gap is reduced with the same amount, to -0,75 and -0,25 per cent.

This reflects the weak GDP figures for 2009.

The forecast for the annual wage growth in 2010 is revised down by 0,5 percentage points to 3,75 per cent, while the growth in 2011 is down by 0,5 percentage points to 4,25 per cent.

The LFS unemployment rate is projected to 3,75 per cent in both 2010 (same as before) and 2011 (+0,25).

The projections for core inflation, measured by CPI-ATE, are revised down by 0,25 percentage points in 2010 and 2011, to 1,5 and 2 per cent respectively.

Statistics Norway released Wedneasday its Labor Force Survey(LFS) figures.

The LFS unemployment was unchanged as percentage of the labor force. But employment fell 3.000 from December, partly counteracting the December increase.

“The major picture is a flat development for the employment. Yesterday’s LFS figures should have little impact on the Central Bank’s assessments,” DnB NOR Markets says.

In Europe the downgrading of Portuguese government debt by the rating agency Fitch sparked another euro fall.

“The downgrading is another reminder that the euro zone-s fiscal problems are not limited to Greece.”

The debt was downgraded from AA to AA-, still well above Greece’s BBB+, and eligible as collateral for ECB loans.

The EUR is Thursday morning down roughly 1 per cent versus the USD from yesterday.

Today the E.U. two-day summit meeting starts, and the markets will closely monitor any statements regarding how to handle the debt problems for several European countries.

The U.S. treasury yields increased after the USD 42bn auction in five-year notes met weak demand.

The Central Bank of Norway Executive Board’s monetary policy decision.

(Charts and background material)

Here’s a copy of today’s morning report from analyst Kyrre Aamdal at DnB NOR Markets.

Related by the Econotwist:

Norway: A Mutated Dutch Disease

Norway’s GDP Growth Slows Down

Norwegian Oil Explorer Files For Bankruptcy

Consumer Confusion Index At Record High

Central Bank Of Norway Call For A New “Global Order”

Evaluation Of Norwegian Monetary Policy

Norway’s GDP Fall For First Time In 20 Years

European Markets Snap Shots

Stocks rallied and the euro snapped a two-day decline against the dollar as Germany backed a Greek rescue proposal.

Europe’s Stoxx 600 Index rose to the highest level in 18 months, while the the MSCI World Index gained 0.3 percent.

The euro strengthened as much as 0.4 percent against the dollar, rebounding from a 10-month low.

U.S. Index futures also rise.

Here’s some snap shots from the European Markets:

Stocks

Germany – DAX:

Norway – OSEBX:

Currencies

EUR/USD:

USD/NOK:

Metals:

GOLD:

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