Norwegian economic outlook slightly weaker than expected, key interest rates likely to reach zero by 2016-end

Norway's central bank is expected to further lower rates three times in 2016. The key rates are likely to reach zero by the end of 2016. There are many reasons for this. Oil prices are lower and are expected to remain low for a longer period of time. This indicates stronger cuts in cost in oil related industries and reduced oil investment.  Moreover, the 2016 oil investment survey indicated towards a sharp fall in oil investment this year.

Furthermore, in H2 2015, the Norwegian economy stagnated. The slowdown is mostly oil related. However, other signs of weakness were also seen such as a severe decline in investment amongst mainland companies. Meanwhile, the wage settlement is mostly expected to be more modest than anticipated. The labor unions seem to demand unchanged real wages. The nominal wage growth is expected to be at 2.5%, which is lower than Norges Bank's earlier projection of 2.75%. Downside threats have increased to the international scenario and expected interest rates outside the country have dropped noticeably. In order to stop NOK from appreciating too much, three rate cuts are required.

The Norwegian economic outlook is slightly weaker than projected earlier. The central bank in December had projected the key interest rate to reach 0.39%. Norges Bank will have to revise down this forecast. The central bank had given the rate cut in March a high possibility in its report in December.  And mostly all news since then is on the weaker side, which might urge the Norges Bank to cut rates again in June. The timing for the third cut is uncertain, but it is expected that the central bank might cut in December.

"We believe Norges Bank will be hesitant in cutting into negative territory due to the uncertain costs", says Nordea Bank.