Rate cut aimed at boosting growth

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The board of Norway’s central bank finally acted on its plans to lower interest rates before the summer holidays set in, noting that wage growth had been “a bit” lower than expected. Bank boss Øystein Olsen has repeated claims he’s not worried about the economy, but decided nonetheless to bring the bank’s key lending rate down its lowest level ever, while hinting that another reduction may come this fall.

Øystein Olsen, governor of Norway's central bank, warned politicians on Thursday against spending too much of Norway's oil revenues. He also worried about household debt levels. PHOTO: Norges Bank

Øystein Olsen, governor of Norway’s central bank, finally announced a reduction in interest rates on Thursday that had been postponed earlier in the year. PHOTO: Norges Bank

“Developments in the Norwegian economy have been slightly weaker than expected and the economic outlook has deteriorated somewhat,” Olsen stated Thursday morning after the board had met on Wednesday.

The board “therefore decided to reduce the key policy rate now,” Olsen said, by a quarter-point from 1.25 percent to 1 percent.

The rate cut had been widely urged and expected, with four out of five economists telling newspaper Dagens Næringsliv (DN) earlier this week that they also were calling for a reduction. “If Norges Bank doesn’t cut rates now, it would be at odds with the very clear signals that the bank sent out both in March and in May,” Kjersti Haugland, senior economist at DNB Markets, told DN. “The consequence of such a surprise could be that the krone would strengthen again, and that would contribute towards weakening Norwegian companies’ profitability and competitiveness.”

Norway’s currency barely reacted to the interest rate reduction on Thursday when it was first announced, continuing to trade at around NOK 7.6 against the strong US dollar. The krone weakened a bit later, though, with the krone/dollar exchange rate standing at NOK 7.7 about an hour after the interest rate announcement. It had strengthened a bit from earlier in the week, however, when it took nearly NOK 7.8 to buy a dollar.

Offsetting the offshore decline
The rate reduction comes during a week that has seen another round of major layoffs in Norway’s oil and offshore industry. Olsen noted that, “as expected,” unemployment has increased while wage growth is “set to be lower than projected in March. He predicted, however, that the decline in oil investment that has led to the layoffs and industry slowdown “will be less pronounced than projected earlier.”

Consumer price inflation, meanwhile, “is close to 2.5 percent,” the higher end of an expected range of desired price growth, and the central bank’s executive board believes the depreciation of the krone last year “will underpin inflation in the coming period. Further ahead, lower wage growth and fading effects of a weaker krone will pull down on inflation.”

Growth vs rising debt levels
One of the biggest arguments against a reduction in interest rates has been Norway’s overheated real estate market and high level of household debt. Lower rates presumably will make it even easier for Norwegians to borrow more money, thereby raising debt levels and housing prices even higher.

Olsen noted, however, that housing prices “have risen at a slower pace than expected.” Real estate brokers have indeed reported prices flattening out and even slightly declining in some markets as borrowers become more cautious and the government sends signals to commercial banks to tighten lending requirements. Household debt, Olsen admitted though, is steadily raising and that remains a concern.

It’s the perceived need to bolster the economy and offset the downturn in the oil industry, by helping Norway’s other mainland industries remain competitive, that mostly fueled the rate cut. It had been delayed, surprising economists last month and in March, when rates were left unchanged. Olsen even suggested that the central bank’s key policy rate “may be reduced further in the course of autumn,” given the current assessment of the outlook for the Norwegian economy. Until then, the bank board will adjourn for the summer before regrouping and reassessing.

newsinenglish.no/Nina Berglund

  • frenk

    Consumer inflation at 2.5%…..an overheated housing market….record amounts of personal debt….and the banks is cutting interest rates to support a ‘virtually non-existent’ Norwegian economy (outside of the oil and gas industry)…..wow…these people don’t have a clue what they are doing?
    “Developments in the Norwegian economy have been slightly weaker than
    expected and the economic outlook has deteriorated somewhat,”…..so…what does this actually mean?

    • inquisitor

      It means I need to buy a new Tesla.

  • frenk

    If Norwegians are ‘so wealthy’….then why is household debt ‘steadily rising’…this just doesn’t make sense?

  • Olivier

    Hum, either I do not see the big picture, or this is a future train wreck. So basically, lot of people are already head over heels in debt, but instead of trying to make them lend less, we basically give them free money.

    I’m a bit on the stupid side, but given the interest rate of some account, on the lending rate, doesn’t it make sense to borrow money you place into an account ?

    • frenk

      “It’s a bit discouraging that the sick leave in Norway is twice the level of other plants,” Havdal said. “That is to me an indication that something is not as it should be.”

      With per capita GDP around $100,000, the Norwegian lifestyle has become such that the work week averages less than 33 hours, one of the lowest in the world, and while unemployment is low, there is large underemployment, made possible by benefits.

      In 2012, a new word entered the Norwegian lexicon – to “nave”, or live off benefits from welfare agency NAV.

      “Approximately 600,000 Norwegians … who should be part of the labour force are outside the labour force, because of welfare, pension issues,” says Siv Jensen, the finance minister.

      Company executives and some government officials say Norway needs to limit wage increases to productivity, limit oil cost growth, cut taxes like neighbours have done and spend less of the oil money. Some say it should even depreciate its currency.

      http://uk.reuters.com/article/2014/05/08/uk-norway-economy-insight-idUKKBN0DO07520140508