More rate cuts by Norges Bank to come

There is no doubt that the oil related weakness is hitting the Norwegian economy. Manufacturing production is falling due to lower production in industries producing capital goods for the oil industry. Unemployment is increasing, but it is in parts of the country hit hard by the oil downturn. So far we have seen few signs of effects on industries outside those directly linked to oil. Development in indicators for growth and capacity utilisation since June seems to be well in line in Norges Bank view.

Inflation on the other hand has been on the upside to Norges Bank forecast, last month by 0.4% points. That argues for higher rates, but Norges Bank has given less weight to running inflation different from forecast lately. The big question is how Norges Bank judges the drop in oil prices versus the weakness of NOK.  

"Based on Norges Banks previous reaction we would believe that weaker NOK and higher inflation would be given more weight that the drop in oil prices, read more here. We are therefore in doubt about our forecast for September cut", says Nordea Bank.

However if Norges Bank were to leave rates on hold in September it will most likely be nothing more than a delay. The argument for further cuts in Norway is strong. The downturn in the oil related industries is probably not over and some secondhand effects especially among business to business services are likely to see, which have expanded strongly the last years, adds Nordea Bank. 

"More important perhaps is that core inflation soon will peak and next year will fall down to say 1½ %. Imported inflation is currently close to 3% held up by the past weakness of NOK", argues Nordea Bank.