Key rate cut to fend off recession

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Norges Bank’s decision on Thursday to cut its “key policy rate” by another quarter point is aimed at stimulating economic growth and warding off recession, economists claim. Its effect on the country’s still warm housing market is uncertain, but the rate cut is also an unbashed move by the executive board of Norway’s central bank towards a climate of negative rates.

Central bank boss Øystein Olsen still didn't think the time was right to lower interest rates in Norway. PHOTO: Norges Bank

Central bank boss Øystein Olsen announced another interest rate reduction on Thursday, paring Norges Bank’s “key policy rate” down a quarter-point to just 0.5 percent. PHOTO: Norges Bank

“Growth prospects for the Norwegian economy have weakened somewhat and inflation is expected to moderate further out,” Norges Bank Governor Øystein Olsen stated in justifying the reduction of an already record low key policy rate of 0.75 percent to just 0.5 percent.

Olsen also made it clear that the bank board may reduce the key policy rate yet again later this year. It could drop another quarter-point, for example, and then down to zero, given Olsen’s comments earlier this year that “we still have a way to go” on trying to stimulate the economy through monetary policy.

Thursday’s rate cut had been widely expected, and it was also expected to further weaken the Norwegian krone. That didn’t immediately occur this time around, with the krone actually strengthening a bit against the US dollar. After trading at just over NOK 8.50 on Wednesday, it cost just NOK 8.35 to buy a dollar by mid-morning on Thursday, after the interest rate reduction was announced.

Economy ‘weaker than expected’
Olsen stated that global growth is now viewed as being “somewhat lower than expected” while interest rates abroad have also fallen. While some key political, business and labour officials have now declared a “crisis” in Norway as a result of the dive in oil prices, Olsen and his colleagues were more restrained.

After firmly denying Norway was in any “crisis” earlier this year, though, Olsen conceded that “developments in the Norwegian economy have been weaker than foreseen and unemployment is expected to edge up.” He added that the krone’s depreciation has pushed up consumer price inflation and “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.”

Instead of just hinting at the prospect of even lower interest rates ahead, Olsen clearly stated in the bank’s own press release that “the current outlook for the Norwegian economy suggests that the key policy rates may be reduced further in the course of the year.” That poses higher uncertainty “surrounding the effect of monetary policy,” though, meaning that his executive board will be “proceeding with greater caution” in setting interest rates. He noted that lower rates, for example, can “increase financial system vulnerabilities.” If the Norwegian economy is exposed to new major shocks, Olsen stated, the board “will not exclude the possibility that the key policy rate may turn negative.”

Uncertain effect on mortgage market
Not only had economists predicted Norges Bank would cut rates, several were urging the move in an effort to ward off recession. The fall in oil prices has led to massive cutbacks in Norway’s most important industry, with the numbers of unemployed reaching their highest point ever, even though the actual unemployment rate remains relatively modest at less than 4 percent nationwide. While some export-oriented industries are doing well, such as seafood and metals, Olsen is acknowledging that overall growth is below expectations, thus leading to the move to make borrowing cheaper.

The low rates are terrible for Norway’s ever-growing ranks of retirees who aren’t earning much of anything on their savings and actually losing money when the low interest rates are offset by higher inflation. Low rates traditionally stimulate debt-heavy sectors like real estate and housing, but some argue that housing prices are already uncomfortably high, and worry that lower rates may force them up even more.

Bank officials noted on national radio Thursday morning, however, that consumers may not see the central bank’s interest rate reduction reflected in mortgage rates. The banks often must resort to other sources of funding mortgages, where interest rates aren’t so low.

newsinenglish.no/Nina Berglund