Norges Bank surprise rate cut not enough to rein in NOK
The Norges Bank wrong-footed the market on Wednesday with an interest rate cut aimed at stemming demand for the NOK, but many believe it will have to get more aggressive to truly rein in the currency.
The central bank cut its main lending rate by 25 basis points to 1.5%, confounding expectations which, according to a poll from Reuters, had seen 92% of respondents expecting no policy change. “The continuing downturn abroad and the strong krone are contributing to keeping inflation low and are weighing on growth in Norway,” says Øystein Olsen, Norges Bank governor.
The central bank lowered its growth projections, saying that interest rates would remain low for longer than it had been anticipating.
Most had believed the Norges Bank, which delivered a surprise 50bp cut in December, would keep rates unchanged to prevent a bubble developing in the Norwegian housing market and to not encourage the recent rapid credit growth witnessed in the country.
The krone had been sent to a nine-year high around NKr7.40 against the euro earlier this month – and its highest level on a trade-weighted basis since 1986 – as investors bet that rising oil prices and a relatively favourable growth outlook would support the currency.
NOK in demand since the start of the year
The surprise move from the Norges Bank took EURNOK up above NKr7.57 on Wednesday but some were looking to call the central bank’s bluff over its commitment to low rates. They consider the NOK to be a buy on dips given the probable effect on the country’s terms of trade of a rising oil price.
Carl Hammer, head of FX strategy at SEB, was looking to fade the move. “We will head higher, but not much, towards NKr7.60/70,” he says. “But short-term I would still like to sell EURNOK on rallies.”
Divyang Shah, strategist at IFR Markets, said the combination of a rate cut and a lower growth profile were a surprise and suggested that NOK strength has had much more of an impact on the Norges Bank than widely thought.
“The sensitivity to the NOK strength means that for now they will rely on rates to do the job despite the fact that domestic demand would call for steady to higher rates,” he says.
Shah added that the Norges Bank might eventually have to follow the Swiss National Bank and introduce other measures to dampen NOK demand.
“The move higher on EURNOK is likely to prove temporary as rate differentials, the market positive view on oil and a lack of safe-haven alternatives all suggest that the NOK will remain in demand,” he says.