Norway Monetary Policy September 2016


Norges Bank leaves rate unchanged at 0.50%

At its 21 September policy meeting, Norges Bank (NB) decided to leave its key policy rate at the all-time low of 0.50%, as was expected by market participants.

Norges Bank noted that global growth was moderate and that in the medium term import demand from its main trading partners will be lower than previously expected. Oil prices have been moving between USD 45 and USD 50 per barrel, as foreseen in the Bank’s last report in June. Moreover, oil supply remains very high, which is keeping upward pressure on oil prices at bay. These factors suggest that the Norwegian economy faces a difficult recovery, thus confirming the utility of monetary stimulus. A strengthening krone in recent months and lower-than-expected policy rates abroad further underscore the NB’s strategy of keeping the key policy rate at its current low level.

At home, the Bank stated that growth has been slightly faster and inflation higher than expected. Consumer confidence has improved and several sectors reported that economic activity has picked up recently, according to the report. Based on its evaluation of the current state of the economy, the Bank increased its projection for mainland GDP growth by 0.1 percentage points to 0.9% this year. The growth rate projection for next year now stands at 1.8% (1.6% in June).

Most analysts believe that the NB will stay put until the end of the year. However, Erik Bruce, Chief Analyst at Nordea points out that risks which could trigger a further decrease of the key policy rate persist:

“If we are right about growth gaining momentum and unemployment having peaked, interest rates should have bottomed. […] Still, fast and sharp NOK strengthening could trigger further rate cuts. Strong NOK appreciation would not only mean lower inflation, it would also weaken Norwegian competitiveness and threaten the desired transformation.”

Fast-rising house prices and pass-through effects from the depreciation of the krone in recent years have fueled inflation, which has been well above the NB’s target rate of 2.5% since the beginning of the year and reached a multi-year high of 4.4% in July. As a consequence, the Bank increased its 2016 inflation projection from 3.3% to 3.6%. For 2017, the inflation forecast was hiked from 2.2% to 2.6%.

The next monetary policy meeting is scheduled for 15 December.

FocusEconomics Consensus Forecast panelists expect a sight deposit rate of 0.39% at the end of 2016. In 2017, the panel sees the key policy rate remaining broadly stable at 0.40%.

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Norway Monetary Policy Chart

Norway Monetary Policy September 2016 0

Note: Sight deposit rate in %.
Source: Norges Bank (NB).

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