Thursday, June 18, 2015

Norway cuts rate 25 bps, may cut again in H2 2015

    Norway's central bank cut its key policy rate by 25 basis points to 1.00 percent, as expected, an said it may cut the rate further in the second half of the year due to an economic outlook that has "deteriorated somewhat."
    Norges Bank, which in May said it expected to cut the rate today, said the Norwegian economy had developed slightly weaker than expected, with wage growth lower than forecast and growth expected to remain weak over the next six months.
    Weighing the path of monetary policy ahead, the central bank's executive board considered that growth prospects and the forces driving inflation, such as lower wage growth, had weakened and this implied a lower policy rate.
    However, the board added that a lower interest rate "may fuel house price inflation and debt growth,"noting that house prices had risen at a slower pace than expected but household debt had still continued to rise.
    In response, the central bank recommended that Norway's finance ministry raise the countercyclical capital buffer for banks to 1.5 percent from June 30, 2016 from 1.0 percent that will take effect on June 30 this year. The finance ministry endorsed the bank's assessment.
   In its latest monetary policy report, Norges Bank said the impact of lower oil prices and weaker demand from the petroleum industry appeared to be "somewhat more pronounced" than previously assumed, implying a key policy rate forecast of a little higher than 0.75 percent in the coming year, followed by a gradual rise in the rate.
   Norway's inflation rate rose to 2.1 percent in May from 2.0 percent in April, slightly below the central bank's target of 2.5 percent.

    Norges Bank issued the following statement:
"Norges Bank's Executive Board decided to lower the key policy rate by 0.25 percentage point to 1.00 percent.
"Developments in the Norwegian economy have been slightly weaker than expected and the economic outlook has deteriorated somewhat. The Board has therefore decided to reduce the key policy rate now", says Governor Øystein Olsen.
As expected, unemployment has increased. Wage growth in 2015 is set to be lower than projected in March. According to Norges Bank's regional network, output growth has edged down and reporting enterprises expect growth to remain weak over the next half-year. Further out, there are prospects that the decline in oil investment will be less pronounced than projected earlier.
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. House prices have risen at a slower pace than expected, but household debt is steadily rising.
"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", says Governor Øystein Olsen."


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