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By Bloomberg

Traders anticipating a December rate cut from Norway’s central bank may have let concern over plunging oil prices go too far.

Brent crude has dropped more than $30 from a June high and is now trading at about $83, threatening to hurt growth in western Europe’s biggest crude producer. Oil prices fell into a bear market last month as global demand slowed and supplies swelled from producers outside OPEC, with the U.S. pumping at the fastest pace in more than three decades. Yet the lower oil prices are dragging down the krone, doing the central bank’s work for it, according to some economists tracking Norway.

“The fear of a rate cut in December is overdone,” said Gaute Langeland, chief analyst at Nordea Markets AB. “A weakening of the krone offsets the need for a rate cut -- with the currency where it is right now, we see no justification.”

As an investment boom in petroleum projects fades, policy makers are doing what they can to support an expansion in the $510 billion economy. Norges Bank Governor Oeystein Olsen last month kept rates unchanged at 1.5 percent and said the drop in oil has “increased the uncertainty regarding the outlook for the Norwegian economy.”

Forward-rate agreements expiring in December gained three basis points today to 1.63 percent, erasing most bets on a rate cut by then. The March contract trades at 1.5 percent. The contract settles to the three-month Norwegian interbank offered rate, currently at 1.64 percent.

Krone Slumps

The drop in oil prices has pushed the Norwegian krone down about 4 percent against the euro since June. It has weakened 10 percent against the dollar this year.

A report last week showed manufacturing production slid 2.1 percent in September, more than four times the estimated decline, raising rate cut speculation.

While the data adds to downside risk for Norges Bank’s forecasts, it will probably not be enough to trigger a rate cut, according to Svenska Handelsbanken AB.

“As Norges Bank, in our opinion, hasn’t fully incorporated the negative spill-over effects from the declining activity on the continental shelf to the real economy, we see a downside risk to their growth estimates,” Ingvild Borgen Gjerde, an analyst at Handelsbanken in Oslo, said in a note. “At the upcoming December meeting we do expect some revisions to these growth forecasts, but we do not expect a rate cut. The significant krone weakening since the September meeting probably prevents a rate cut for now.”

Inflation Accelerates

Inflation also weighs against further rate cuts. Norwegian underlying consumer prices rose 2.5 percent in October, up from 2.4 percent in the previous month, a report today showed.

Traders have been wrong-footed on Norway before. Market pricing in July overestimated the chance of a rate cut at Norges Bank in September. By August they fell into line with economists tracking monetary policy who said the central bank would not follow through with the cut it signaled in June.

“Currency markets like to react ahead of what happens,” Olsen said in an interview after a speech last month. “It remains to be seen how long oil price will be at this level. It can swing up again.”