Central bank cuts interest rates again
March 14, 2012
Three weeks ago, the head of Norway’s central bank told a group of foreign correspondents in Oslo that while the bank’s key interest rate was very low, “it’s not zero.” That proved to be strong hint that the bank’s executive board could still cut rates and they did just that, in a move that surprised the market on Wednesday.
Øystein Olsen, officially the governor of Norges Bank, pointed to an ongoing economic decline abroad and the strong Norwegian currency as reasons for cutting the bank’s key policy rate by another quarter-point, from 1.75 percent to just 1.5 percent.
Cutting the rate was not an easy decision in a domestic market where housing prices keep soaring and Norwegians in general now have record high levels of home mortgage debt. Low interest rates have allowed homebuyers to borrow more and more money, and some Norwegian economists are calling the high levels of household debt “a ticking time bomb.” Some would like to see rates rise, to make borrowing less attractive.
But Olsen and his colleagues at the central bank seem more concerned about the record strength of the Norwegian krone, which makes Norway’s already high-prices even higher on an international basis and thus threatens the competitive ability of Norwegian industry and exporters. Cutting interest rates, or literally the price of Norway’s money, is a means of reducing the value or strength of the krone. Raising rates would make the krone stronger than it already is.
As Olsen also told correspondents in February, it was a “dilemma” whether to cut rates or not to cut. Several so-called “experts” had told Norwegian media earlier this week that they thought the board should keep rates unchanged. The board, however, opted to reduce the key policy rate for the second time since December, and said that it would remain “in the interval between 1-2 percent” at least until June, “unless the Norwegian economy is exposed to new major shocks.”
Olsen said the “continuing downturn abroad and the strong krone are keeping inflation low and are weighing on growth in Norway.” Economic growth and interest rates are also expected to remain low “in most advanced economies,” the bank board noted, even though there’s been some improvement in international financial markets.
The bank board said that growth in the Norwegian economy “is holding up,” but growth projections have also been lowered somewhat. The krone is strong and inflation is projected to remain between 1.25 and 1.5 percent until the end of the year.
Olsen also said that the “current outlook suggests that the key policy rates may remain low longer than projected earlier. There is a high level of uncertainty regarding economic developments, and we have monetary policy leeway in both directions.”
It remained unclear whether commercial banks would cut their interest rates in line with Norges Bank. Several failed to do so last year when rates declined, because of a need to cover other rising costs.
Views and News from Norway/Nina Berglund
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