Norway: Norges Bank leaves rate unchanged in November, policy rate to close 2015 at 0.75%.
November 6, 2015
At its 5 November monetary policy meeting, Norges Bank (NB) decided to maintain its policy rate at 0.75%. The NB had decided to cut the rate to its current level at its last policy meeting, held on 24 September. The Bank’s latest decision was largely anticipated by market analysts, who speculated that the weaker-than-expected currency and an expansionary fiscal policy outlined in the 2016 Budget would deter the Bank from continuing its loosening cycle. The Bank noted that such fiscal policy would promote consumption going forward and that it is likely to take some pressure off of the Bank, which has been facing a tradeoff between stubbornly-low output and increasing upward risks to inflation.
In the Executive Board’s assessment, the NB stated that most indicators had evolved as expected. Developing economies are seeing declines in activity as demand for commodities remains low. Global inflation has also been affected by lower demand for commodities, particularly energy, which has translated into lower commodity prices and has helped keep inflationary pressures muted across the globe. Norway has also seen its growth prospects collapse as investment in the country’s large oil and gas sector has dried up. Such developments were apparently underestimated by the NB—recent data for household good consumption, manufacturing output, and unemployment have come in weaker than expected.
Although such developments might otherwise call for looser monetary policy, the Bank noted that core inflation exceeded the 2.5% target in September, and that the rise was primarily due to higher import prices stemming from the weak krone. The value of the krone is strongly correlated with the price of crude oil, and, as crude prices languish at historically-low levels, the currency has seen a depreciation recently. This has translated into higher inflationary pressure, via the higher costs for imported goods, and further cuts to the policy rate could exacerbate these pressures. NB sees inflation unwinding as the transitory effects of the loosening cycle diminish. The NB also sees fiscal policy as laid out in the 2016 Budget doing more of the heavy lifting for the economy, taking some pressure off of the Bank. The proposed budget outlines a non-oil deficit of NOK 195 billion, translating into a 0.7 percentage point increase to the non-oil deficit.
The NB refrained from including any information regarding future rate cuts in its statement, contrasting previous policy meeting. However, uncertainty in global financial markets, and a trend toward lower policy rates in most developed economies may force the NB to reevaluate its current policy stance. The NB summarized its position by stating, “the krone exchange rate has been weaker than projected, and a more expansionary fiscal policy will contribute to fuelling demand for goods and services. An overall assessment of new information implies that the key policy rate be kept unchanged at this meeting.” The next policy meeting is scheduled for 17 March 2016.
Author: Robert Hill, Economist