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Inflation has fallen faster than expected in Norway and Denmark, fuelling expectations that central banks in the region will stop raising interest rates in response to the cooling of price pressures and falling economic output.
The figures, mirroring similar steeper-than-expected falls in other European countries, are contributing to a shift in sentiment away from concern about the soaring cost of living to worries over whether hefty increases in borrowing costs could deepen a likely economic downturn.
Norwegian consumer price inflation slowed to a 20-month low of 3.3 per cent in the year to September, which was down from 4.8 per cent in August and well below the 4.2 per cent forecast by Norges Bank, the country’s central bank.
Norges Bank said it planned to raise its policy rate again in December after lifting it by a quarter point to 4.25 per cent last month — the highest level since 2008. However, analysts said the faster than expected cooling of price pressures meant the central bank was unlikely to raise rates again.
Jens Magnusson, chief economist at Swedish bank SEB, said the “surprises on the downside [in Norway’s inflation data] were fairly broadly based and we will revise our near-term inflation forecast downwards”. He added that the data “undoubtedly reduces the probability of future hikes from the central bank”.
The sharp slowdown in Norway’s consumer price inflation followed a 0.2 per cent contraction in the country’s gross domestic product in August compared to the previous month, mainly due to lower wholesale and retail trade activity.
Economists at Finland’s Nordea Markets said core inflation in Norway — excluding energy prices and tax changes — also fell faster than the central bank forecast, dropping from 6.3 per cent to 5.7 per cent. “These figures put Norges Bank’s December hike in question,” they said. “We believe Norges Bank will stay put in December.”
Inflation in Denmark also undershot expectations, slowing from 2.4 per cent in August to 0.9 per cent in September, its lowest level since February 2021. That followed a 0.3 per cent contraction in Danish GDP in the second quarter and a warning from the country’s central bank that the economy was likely to shrink over the whole of this year.
Danish goods prices fell 2.9 per cent in the year to September — the biggest drop for over 22 years — while services inflation fell from 5.2 per cent to 4.8 per cent. This helped core inflation in the country — excluding energy and unprocessed foods — to drop to 3.7 per cent, down from 4.2 per cent in August.
Nordea Markets said the decline meant Danish inflation had dropped the furthest below eurozone price growth for more than 40 years.
Erik Nielsen, chief economics adviser at Italian bank UniCredit, said the Nordic data “vindicated” his view that much of European inflation stemmed from energy and food supply shocks, and not strong demand.
“If I’m right on this, the central banks are indeed making a potentially grave mistake with big cost to the European economy,” he said, adding that much of the impact of higher interest rates was yet to take full effect.
The IMF, however, warned on Tuesday that global inflation was likely to remain high despite slowing economic activity, as it raised its forecast for overall price growth next year while cutting its growth prediction for the world economy.
Source: Economy - ft.com
