Norway: Norges Bank cuts rate to record low in June
June 18, 2015
At its 18 June monetary policy meeting, Norges Bank (NB) decided to cut its sight deposit rate by 0.25 percentage points to a record low of 1.00%. The move was in line with analyst expectations, as they had been expecting the Bank to reduce the rate at both of the previous monetary policy meetings, which took place in March and May. The Bank last cut rates at its December 2014 meeting, reducing the deposit rate from 1.50% to 1.25%.
In its statement, NB stated that economic developments in the country have been weaker than expected and therefore the economic outlook has deteriorated. Consumption has remained robust, however, business investment has declined, and growth in housing investment also has disappointed since the last meeting. Across industries, growth expectations have weakened, particularly in the oil services sector where the effects of lower oil prices have been more prolonged than the Bank had expected. Unemployment also increased beyond expectations according to the Labor Force Survey and the Bank sees it inching up further over the next period.
Regarding inflation, NB voiced concerns that lower wage growth and a depreciating krone will lessen inflationary pressure. House prices registered a weaker-than-expected increase, while household debt has risen steadily as a result of lower interest rates. The Bank sees stricter lending practices from banks and weaker developments in the Norwegian economy contributing to downward pressure on house prices and a reduction in the accumulation of household debt. NB went on to say that, “consumer price inflation is close to 2.5 percent. The krone depreciation in 2014 will underpin inflation in the coming period. Further ahead, lower wage growth and fading effects of a weaker krone will pull down on inflation.”
NB Governor Olsen pointed out that a further easing of monetary policy may be appropriate later in the year, stating, “the current assessment of the outlook for the Norwegian economy suggests that the key policy rate may be reduced further in the course of autumn.” Despite the rate cut, Norway still has some of the highest rates in the Nordic region and in Europe, and it therefore has room for further decreases. The next policy meeting is scheduled for 24 September.
Author: Robert Hill, Economist