Thursday, March 17, 2016

Norway cuts by 25 bps, may cut further and to negative

    Norway's central bank cut its key policy rate by 25 basis points to 0.50 percent, as expected by most economists, and said it may reduce the policy rate further this year and even push it into negative territory if the economy were exposed to a major shock.
    Norges Bank, which at its previous meeting in December held out the prospect of a rate cut in the first half of this year, said it had cut its rate because growth prospects had weakened and inflation was expected to remain low for a longer time.
     Looking ahead, unemployment is expected to edge up and wage growth this year will be lower this year than in 2015. Inflation, which has been pushed up by a depreciation of the krone, will eventually drift down as the impact of the lower exchange rates unwind.
    "The current outlook for the Norwegian economy suggests that the key policy rate may be reduced further in the course of the year," the central bank governor, Oeystein Olsen, said.
    However, Olsen also pointed to growing uncertainty over the impact of lower rates on the financial system, which he said suggests greater caution in setting interest rates.
    When the central bank left rates steady in December, following cuts of 50 basis points earlier in the year, it cautioned that further cuts could risk boosting home prices and household debt.
    In its latest monetary policy report, the central bank maintained its forecast for the key policy rate to remain at 0.5 percent this year but lowered the forecasts for 2017 to 0.2 percent from 0.4 percent forecast in December, implying another rate cut by next year.
    For 2018 the key policy rate was seen remaining at 0.2 percent, sharply below the previous forecast of 0.7 percent. For 2019 it was seen rising to 0.5 percent.
    The outlook for inflation this year was raised to 3.1 percent from 2.8 percent forecast in December due to the impact of the lower exchange rate on import prices. In February Norway's headline inflation rate rose to 3.1 percent from 3.0 percent in January.
    But for 2017 inflation was seen averaging 2.3 percent, down from 2.5 percent and slightly below the central bank's 2.5 percent target.
    For 2018 inflation was seen easing further to 2.1 percent compared with its 2.2 percent previous forecast. For 2019 inflation was seen at 1.7 percent.
    The outlook for growth in mainland Norway was seen averaging 0.8 percent this year, down from the December forecast of 1.1 percent, and for 2017 growth was seen at 1.8 percent, down from 1.9 percent as the unemployment rate rises to 3.5 percent from 3.3 percent in 2016.
   In 2018 Norway's economy is seen expanding by 2.3 percent, unchanged from its previous forecast, and then by 2.5 percent in 2019.

    Norges Bank issued the following statement:

"Norges Bank's Executive Board decided to lower the key policy rate by 0.25 percentage point to 0.50 percent.
"Growth prospects for the Norwegian economy have weakened somewhat and inflation is expected to moderate further out. The Board has therefore decided to lower the key policy rate", says Governor Øystein Olsen.
It appears that global growth will be somewhat lower than expected and interest rates abroad have fallen. Developments in the Norwegian economy have been weaker than foreseen and unemployment is expected to edge up. The krone depreciation has pushed up consumer price inflation. There are prospects that wage growth will be lower in 2016 than in 2015. As the effects of the krone depreciation unwind, inflation will drift down.
"The current outlook for the Norwegian economy suggests that the key policy rate may be reduced further in the course of the year", says Governor Øystein Olsen.
Lower interest rates could increase financial system vulnerabilities. As the key policy rate approaches a lower bound, the uncertainty surrounding the effects of monetary policy increases. This now suggests proceeding with greater caution in interest rate setting. Should the Norwegian economy be exposed to new major shocks, the Executive Board will, however, not exclude the possibility that the key policy rate may turn negative."


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