While the BoE grabbed the spot light last week, the Norges Banks also provided further indications that a primary theme for 2016 will be dovish central banks. As was widely expected, the Norges Bank held key policy rates at 0.75%. The overall assessment was slightly more neutral than September, but only by a hair. The bank noted that the economy had weakened more than expected since the September meeting.
The bank pointed to declining household consumption as a primary culprit. In regards to inflation, it was broadly in-line with expectations although the weaker NOK would equate to disinflation pressure. The accompanying statement reiterated September’s easing bias but did not provide any clear signals that the bank would ease rates in 2015. Governor Olsen provided a balanced outlook, noting that since September “some factors” support raising rates and “some factors” support cutting rates. However, with the economic data and outlook showing concerning decelerations, we anticipate a 25bp cut at the December meeting.
Norway’s industrial production in September increased by 1.6% m/m against 1.7% prior read. The year-on-year growth rate slowed to 2.0% from 3.1%. While the industrial sector has held up relatively well there is a clear flat lining of momentum suggesting that GDP growth will also decline. Retail sales 3Q released in October fell -0.8% following a decline of -0.4% indicating that the consumer is suffering as the effect of lower oil prices persist. In addition, with unemployment rates rising to 4.6% from 4.3%, there is the risk that a deeper consumption driven slowing will take hold. The Norges Bank will cut rates in December to halt the growing decay in confidence spreading through Norway. With the market pricing roughly only 10bp of easing in December, a cut will catch the market flat footed. We remain negative on the NOK and forecast the EURNOK should head back to year highs around 9.61.