Norway: Norges Bank maintains policy rate at 0.50%
May 12, 2016
At its 12 May policy meeting, Norges Bank (NB) decided to maintain its sight deposit rate at 0.50%, which was in line with market expectations. NB had cut the sight deposit rate from 0.75% to 0.50% at its last monetary policy meeting in March amid concerns that the economy would need added stimulus to absorb the negative investment shock stemming from last year’s fall in oil prices. This month, however, NB felt that a balance had been struck between inflation and growth and thus left the rate unchanged.
In its accompanying statement, the Bank explained that the economy appears to be evolving according to projections made in its March monetary policy report. This includes a gradual but steady increase in oil prices. Such an increase will boost the value of Norway’s energy exports, although the rate of increase is slow and it is unlikely that oil prices will reach the highs observed before the collapse in 2015. The rise in oil prices will not drastically alter firms’ decisions regarding investment in the oil and gas sector, which contracted approximately 15% between 2014 and 2015 and is expected to decrease again this year.
On the external front, the krone has been supported by climbing oil prices. Benchmark oil prices are now hovering just under USD 50 per barrel, up from lows of near USD 30 per barrel seen in January and February. Norway’s currency is closely linked to the price of oil as petroleum products make up nearly 60% of total exports. That said, the krone is still considerably weaker in comparison to last year, particularly against the USD, and continues to stir inflationary pressures.
On the domestic front, NB stated that there is little new information regarding economic developments. The housing market has seen slightly stronger inflation compared to what was foreseen in the March policy meeting, while household credit growth has been evolving according to expectations. Although lending rates have fallen, NB stated that it expected to see a more pronounced reduction in banks’ lending rates after its cut to the sight deposit rate in March.
Then Bank stated that developments have not deviated significantly form the March policy report, but noted that the stronger krone may begin to help ease inflationary pressures. Although it did not explicitly alter its rate path in its accompanying statement, the Bank did affirm the expectation of a further rate reduction that was included its March policy report. The Bank concluded by stating that, “inflation remains elevated, but a stronger krone may contribute to a slightly more rapid decrease in inflation than projected in March. On the other hand, the rise in oil prices may reduce uncertainty and contribute to somewhat higher growth in the Norwegian economy.” The next rate decision will be announced 23 June.
Author: Robert Hill, Economist