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Central bank to keep rates low

The executive board of Norway’s central bank (Norges Bank) decided on Wednesday to keep the country’s “key policy rate” at 2.25 percent. The decision had been widely expected and was based on a board consensus that interest rates should remain low because of turbulence abroad.

There was no appetite for higher interest rates at Norges Bank on Wednesday. PHOTO: Norges Bank

“The key policy rate is low,” said Jan F Qvigstad, deputy governor of Norges Bank, in a prepared announcement. “The turbulence and uncertainty abroad, combined with lower inflation and weaker prospects at home, suggest that the key policy rate should be kept low for a longer period than expected in June.”

At that time, the board’s analysis had “implied a gradual increase in the key policy rate through the final half of the year,” Qvigstad recalled. But the world’s financial situation has worsened since then.

“The prospects for the world economy have weakened considerably in the course of the summer,” Qvigstad said. “External developments and the turbulence in financial markets are also affecting the domestic outlook.

“Against this background, we have chosen to leave the key policy rate unchanged.”

The bank board noted that “turbulence liked to the European debt crisis has intensified.” Growth is weak and it’s likely that key interest rates abroad “will be very low” for the next several years.

Developments in the Norwegian economy remain “favourable,” according to the board, “but output and demand for goods and service have also been somewhat weaker than expected at home” while consumer price inflation has slowed.

The bank board’s decision was in keeping with the predictions and recommendations of a wide variety of analysts and economists. “Norwegian rates should remain unchanged through the end of the year and a ways into 2012,” Hilde Bjørnland, a professor at the Norwegian business college BI in Oslo, told newspaper Dagens Næringsliv (DN) earlier this week.

Ida Wolden Bache, senior economist at Handelsbanken Capital Markets, agreed. “The risk of a new finance crisis has increased, interest rate expectations have fallen and growth prospects have weakened,” she told DN. “With the strong krone … and low inflation, this calls for low interest rates.”

Views and News from Norway/Nina Berglund
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