Norway: Norges Bank cuts rate to 0.50%
March 17, 2016
At its 17 March policy meeting, Norges Bank (NB) cut its main policy rate to 0.50% from 0.75%. The move was in line with market expectations, as the Bank’s press releases prior to the meeting had indicated that a rate cut was likely to be in the cards in the first half of 2016. Norway’s economy has been battered by the collapse in oil prices that has cut investment in the country’s oil sector, impacted the labor market and sparked concerns over the health of long-run growth.
In its accompanying statement, the Bank explained that low energy prices are continuing to affect transport costs and are keeping inflation low. Furthermore, NB pointed out that OPEC oil inventories have been built up in 2015 and are expected to further increase in 2016. This will limit any upward pressure on oil prices over the forecast period. Oil futures have also fallen since the last policy meeting. The demand for Norwegian is oil is therefore not expected to recover. Investment in the petroleum industry in Norway fell by approximately 15% between 2014 and 2015, and it is expected to decrease further this year. Oil service exports, which account for nearly a fifth of total mainland Norway exports, have also substantially declined and are expected to decrease by around 10% in the coming year.
Internationally, several central banks around the world, with the notable exception of the Fed, have pushed policy rates into negative territory. Norway is a small open market and low, or negative rates in its trading partners’ monetary policy impact its export competitiveness. At home, the decline in the oil sector, along with weaker growth, have impacted unemployment. Non-oil industries had helped to boost employment growth in 2015, however, their contribution was not enough to keep job growth from declining in the last quarter of 2015. The labor force is expected to increase in the coming year, and with employment prospects falling, the unemployment rate is expected to increase.
Although the economy has slowed, inflation in Norway has been somewhat higher than expected in NB’s December policy report. The weak krone has supported prices via higher costs for imported goods. However, the Bank expects that lower capacity utilization in the Norwegian economy and low wage growth will begin to offset price pressures set by the weak krona. The Bank sees these factors increasing in intensity in the coming year and hampering price increases.
Overall, the decision to cut rates was likely not a difficult one for the NB. The economy is slowing due to falling investment in the oil sector and this is spreading to the wider economy. Also, inflationary pressures are expected to abate, leaving room for monetary policy to keep inflation close to the Bank’s 2.5% target. However the Bank stated that it was acting with caution, noting that the effects of low interest rates have not been explored entirely, particularly their potential for fomenting bubbles and imbalances in the economy. The Bank therefore advised the Ministry of Finance to increase the counter cyclical capital buffer banks hold, thereby suggesting that banks hold extra funds in case imbalances in the economy are corrected and drain excessive liquidity from the banking system.
Then Bank went on to say that although it is entering unchartered waters, it will proceed with caution and that negative interest rates are not off the table. The NB elaborated that it would be, “proceeding with greater caution in interest rate setting. Should the Norwegian economy be exposed to new major shocks, the Executive Board will, however, not exclude the possibility that the key policy rate may turn negative.” The Bank also signaled that the next rate cut could occur in September. The next policy rate decision is scheduled to be announced on 12 May.
Author: Robert Hill, Economist