The Bank of Norway (Norges Bank) surprised the markets on Wednesday when it announced it would cut interest rates yet again, to their lowest level ever. While borrowers can rejoice over lower monthly payments, the interest rate cut isn’t necessarily good news even though Norway’s economy is weathering the global finance crisis better than most countries.
The committee that sets Norway’s key lending rate decided to cut it by another quarter point, to just 1.25 percent. That means mortgage rates in Norway should come down to around 3.25 percent, while savers won’t earn much at all on their deposits.
Jan Qvigstad of the Bank of Norway admitted that “this is the lowest interest rate we’ve had in the central bank’s history.”
The interest rate is widely viewed as “abnormal” and artificially low as state officials try to deal with a global finance crisis that also has hit Norway despite its vast oil wealth. Some analysts went so far as to say that the low interest rate was a sign of “crisis” in the financial markets.
It is, most agree, the only way central bank officials can try to buoy the Norwegian economy. Higher rate levels could boost the value of the Norwegian currency, and that would hurt exports. The finance officials also want Norwegian consumers to start spending again, and low interest rates can stimulate that.
Real estate brokers keen to sell property were delighted by the latest interest rate cut. It can persuade prospective buyers to take out the loans needed to buy up a vast array of properties currently on the market.
There is, of course, a fear that the low rates could lead to another bolig boble in Norway — that is, a situation where low financing costs combined with pent-up demand drive housing prices up to high levels that ultimately can collapse and send the market into a tailspin again.
Several Norwegian securities analysts told Norwegian Broadcasting (NRK) that the low rates are unlikely to last. Banks must continue to be careful, they said, about lending too much money to borrowers who may have trouble making payments when (not if) rates climb again.
It’s widely expected that interest rates will rise “slowly but surely” next year. In the meantime, the central bank clearly viewed the current economic situation as serious enough to warrant the historic cut.