Norway core inflation slows, points to bigger rate cut

Norway's core inflation unexpectedly slowed in November and firms forecast slower growth over the next six months, reinforcing views the central bank may opt for a bigger interest rate cut next week. Norwegian firms said in a central bank survey that they had lowered their investment plans for the next 12 months, in a sign the expected economic slowdown was well on its way.
Core inflation, a key measure watched by Norges Bank, slowed to 1.0 percent last month, against expectations it would stay at 1.2 percent, and is well clear of the bank's 2.5 percent inflation target, Statistics Norway said. "Growth and inflation figures were on the downside, which will make it easier for the bank to cut rates. This confirms the picture that economic growth in Norway looks a little weak," said Erik Bruce, an economist at Swedish bank Nordea.
"We believe the central bank will lower rates by 50 basis points because money market rates are significantly higher than Norges Bank's expectations." Markets unanimously agree the bank will cut its 2.25 percent key rate on December 14. Only the size of the move is in question.
Recent data have come on the softer side of expectations and Statistics Norway on Thursday sharply lowered its 2012 and 2013 growth forecasts due to Europe's protracted downturn. Norway, though, is still set to be one of Europe's best-performing economies next year despite the lower growth forecast of 2.5 percent. The European Central Bank's quarter point rate cut on Thursday to a record low 1 percent also bolstered the case for Norway to cut its key rate by 50 basis points.
But some economists said the picture was not so clear cut and the bank would have difficulty deciding. "Although the regional network survey reported slower growth, we are not talking about a sharp turnaround," said Stein Bruun, a chief economist at Swedish bank SEB.
"So I think this will mean that the central bank will cut rates by 25 basis points, although there is a risk that it will go for something more," Bruun added. Indeed, the share of companies reporting capacity constraints has risen, particularly in construction and services, and firms overall still expect employment to increase, the central bank survey showed, indicating that the downturn is milder than across the European Union.