Thursday, June 23, 2016

Norway maintains rate but raises forecasts slightly

    Norway's central bank maintained its key policy rate at 0.50 percent, saying that its forecast for the policy rate was little changed since March and "there are still prospects that the key policy rate may be reduced in the course of the year."
    Norges Bank, which cut its rate by 25 basis points in March, added that growth was likely to remain weak and inflation, which has been higher than 2.5 percent target, should ease due to lower wage growth and a somewhat stronger krone.
    In an update to its quarterly monetary policy report, Norges Bank maintained its forecast for the key policy rate to average 0.5 percent this year but for 2017 it raised it slightly to 0.3 percent from 0.2 percent forecast in the March report.
   For 2018 the policy rate forecast was also raised to 0.3 percent from 0.2 percent and for 2019 the forecast was raised to 0.6 percent from 0.5 percent.
    The central bank also raised its inflation forecast for this year to 3.3 percent from 3.1 percent forecast in March but lowered the 2017 forecast to 2.2 percent from 2.3 percent.
    For 2018 inflation is seen easing further to 1.9 percent from 2.1 percent previously seen and for 2019 to 1.7 percent, unchanged from March.
   The 2016 forecast for growth in mainland Norway was unchanged  at 0.8 percent while the 2017 forecast was lowered to 1.6 percent from 1.8 percent.
   For 2018 and 2019 growth was seen picking up to 2.1 percent and 2.3 percent, respectively, below the March forecast of 2.3 percent and 2.5 percent respectively.
    The central bank again voiced its concern over the rise in Norwegian home prices, saying vulnerabilities may increase if the rapid rise in house prices persists.
    The countercyclical capital buffer for banks is set to rise to 1.5 percent on June 30 from 1.0 percent  following earlier recommendations by the central bank to the finance ministry, which decides on the buffer every quarter.
   The buffer aims to strengthen the financial soundness of banks and their resilience to loan losses in a future downturn. The central bank's assessment of financial imbalances is based on credit-to-GDP ratios and credit has been expanding faster than economic growth for a while.
    While the growth of credit has eased in recent quarters, economic growth has declined so the ratio of credit has risen, and house prices have continued to accelerate, a sign that financial imbalances are building up.
    Norway's economy expanded by an annual rate of 0.7 percent in the first quarter of this year, up from 0.1 percent in the previous quarter while headline inflation was 3.4 percent in May, up from 3.2 percent in April.
    Earlier this month, Norway's Finance Ministery Siv Jensen told reporters that fiscal policy is now helping support the economy after monetary policy had done its job. In May the government said it would use 206 billion kroner of its oil income to help stimulate the economy by 1.1 percentage point.
    The exchange rate of Norway's krone typically fluctuates with crude oil prices and since mid-January it has been firming following a decline since mid-2014.
   The krone firmed further today following the central bank's decision, quoted at 8.17 to the U.S. dollar compared with 8.25 yesterday and 8.84 a the start of the year for a 8.2 percent appreciation this year.

    Norges Bank issued the following statement:

"Norges Bank's Executive Board has decided to leave the key policy rate unchanged at 0.50 percent.
"The key policy rate forecast is little changed since the March Monetary Policy Report," says Governor Øystein Olsen.
Growth in the world economy is moderate, and oil prices have risen further since March. Financial markets have recently been marked by the uncertainty surrounding the outcome of the UK referendum on continued EU membership. Expected policy rates among trading partners have declined since the March Report. The krone has been stronger than anticipated.
Growth in the Norwegian economy is likely to remain weak in the coming period, even though the upswing in oil prices may reduce uncertainty and push up demand somewhat. Should the rapid rise in house prices persist, household vulnerabilities may increase. Inflation has for a period been higher than 2.5%, but lower wage growth and a somewhat stronger krone will weigh down on inflation ahead.
"There are still prospects that the key policy rate may be reduced in the course of the year," says Governor Olsen."


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