Norway: Norges Bank leaves rate unchanged at 0.50%
June 23, 2016
At its 23 June policy meeting, Norges Bank (NB) decided to leave its key policy rate at the all-time low of 0.50%. The move was expected by markets participants. Although oil prices have climbed steadily since the last policy meeting and the labor market has seen signs of improvement, growth has remained subdued and uncertainty regarding the UK’s referendum on whether to leave the EU also warranted a wait-and-see approach by the Bank.
Norges Bank noted that global growth was moderate and that financial markets have been coping with uncertainty related to the UK’s Brexit referendum. The Bank suggested that although global oil inventories remain high, demand growth from major economies such as the U.S., China and India has been higher than expected and that demand should pick up further in 2016 and 2017.This has resulted in oil prices increasing at a faster rate than envisioned in the March Monetary Policy Report (MPR). This, combined with low interest rates in other countries, has put upward pressure on the krone, which has attached downside risks to the Bank’s inflation forecasts.
At home, the Bank noted that weak growth in the first quarter was in line with its expectations, and that inflation has thus evolved as forecast. Positive developments in the labor market however came as a surprise to NB, as registered unemployment was lower than expected. The labor market surprise and the faster-than-expected increase in oil prices likely decreased the need for another rate cut. However, risks to the economy persist. The NB also noted that house prices had increased more than expected and therefore the risk of an adjustment in housing prices also rose. The bank identified high household debt ratios as a financial imbalance and stated that a sharp decrease in income or a fall in elevated house prices could trigger financial market instability.
The mixed signals NB was getting from the economy actually marked an improvement over the last meeting, in which prospects for the economy appeared more pessimistic. NB has so far managed to avoid cutting rates to zero or resorting to negative rates as many of its regional peers have done, yet the Bank still foresees more monetary policy easing this year. Gaute Marius Langeland, analyst at Nordea, has stated that although the bank reaffirmed its forecast of a 25-basis-point cut before the end of the year, some market participants are beginning to doubt the Bank’s forecast:
“All uncertainty today related to the possibility for changes in the rate path and what signals this would have for the likelihood for a cut at the next meeting in September. In the rate path from March, a September cut had a "100% probability" and Norges Bank today left this unchanged. As such we continue to expect the next cut to take place in September. The market has been speculating about Norges Bank weakening its commitment to a September cut and FRA's have priced about a 50% probability.”
Adding to these doubts, the Bank also stressed the risk associated with low interest rates. Lower interest rates could exacerbate financial imbalances and NB stressed the need for, “proceeding with greater caution in interest rate setting and reacting somewhat less to news that changes the economic outlook,” and added that it did not dismiss the possibility of negative interest rates. The next Central Bank meeting is scheduled for 22 September.
Author: Robert Hill, Economist