Thursday, June 19, 2014

Norway holds rate, warns it may cut if outlook weakens

    Norway's central bank maintained its policy rate at 1.5 percent, as expected, but warned that it may cut its rate if the economic outlook deteriorates.
    Norges Bank, which last cut its rate in March 2012, also pushed back the timeframe for any rate rise by six months until the end of 2015, citing the prospect of lower policy rates in Europe due to weaker inflation expectations and lower than projected growth in Norway.
    "The analyses imply that the key policy rate be held lower longer than previously projected," said central bank Governor Oeystein Olsen.
    "There are prospects that the key policy rate will remain at about today's level to the end of 2015, followed by a gradual rise. A further weakening of the outlook for the Norwegian economy may warrant a reduction in the key policy rate," Olsen added.
    Norway's central bank has been delaying any tightening of monetary policy since 2012 and in December 2013 it pushed back the time for any tightening by one year to the summer of 2015. In its two previous meetings this year in March and May it confirmed the guidance from December.

    "At its meeting, the Executive Board decided that the key policy rate should be in the interval 1% - 2% in the period to the publication of the next Report on 18 September 2014, unless the Norwegian economy is exposed to new major shocks," Olsen said.
    In addition to the prospects of weaker economic growth, the central bank said petroleum investment was expected to decline markedly in 2015 and the krone currency had risen somewhat since March, reflecting the fact that the expected upward shift in interest rates abroad had been pushed further out.
     Norwegian house prices have picked up in recent months and were rising more than anticipated, and while debt remains high the bank said financial imbalances were not building up further.
     In its latest quarterly monetary policy report, the central bank maintained its forecast for inflation through 2017 but trimmed the forecast for economic growth and wage rises compared with its forecast from March.
    "The projections for the Norwegian economy show that capacity utilization may edge down in the coming year, rising gradually thereafter. Inflation is projected to be somewhat below, but close to 2.5 percent in the years head," the bank said.
     The bank forecast average consumer price inflation of 2.0 percent in 2014 and 2015, rising slightly to 2.25 percent in 2016 and 2017.
     Wages in Norway are forecast to rise by 3.5 percent in 2014, unchanged from March, then by 3.5 percent in 2015, down from a previous forecast of 3.75 percent. In 2016 and 2017 wages are forecast to rise by an unchanged 4.0 percent.
    The 2014 forecast for Gross Domestic Product for mainland Norway was raised by a quarter of a percentage point to 2.0 percent, but the forecast for 2015 was cut to 2.25 percent from 2.50 percent, the 2016 forecast was cut to 2.75 percent from 3.0 percent while the 2017 forecast was raised to 3.0 percent from 2.75 percent.
    Norges Bank also revised downward its forecast for its policy rate in coming years. The forecast for 2014 was maintained at 1.5 percent, while the forecast for 2015 was cut to 1.5 percent from 1.75 percent, the 2016 forecast was cut to 1.75 percent from 2.0 percent and the 2017 forecast was cut to 2.0 percent from 2.50 percent.
    Norway's headline inflation rate was steady at 1.8 percent in May and April, below the central bank's target of 2.5 percent inflation.
    The country's economy expanded by 0.3 percent in the first quarter of this year from the previous quarter for annual growth of 3.9 percent, up from 1.1 percent.


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