Central bank cuts interest rates

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UPDATED: The executive board of Norway’s central bank (Norges Bank) cut its key lending rate by a full half-point on Wednesday, because of concerns over effects of global financial turbulence and the euro crisis. The move brings the nation’s most important benchmark rate down to 1.75 percent, but bank customers can’t expect to see their mortgage rates decline.

“The turbulence in financial markets has intensified and external growth is now expected to be clearly weaker, particularly in the euro area,” said the central bank’s deputy governor Jan F Qvigstad. He said the rate cut was meant to “dampen the impact” of the turbulence on the Norwegian economy and “guard against an economic setback.”

May ease exports
The half-point reduction in what’s officially called the “key policy rate” also may ease the strength of the Norwegian currency, the krone, against other currencies, which in turn could help boost local industry and exports. The country’s strong currency has made Norwegian prices even higher on an exchange basis and sharply reduced the comparative value of, for example, the British pound and the US dollar.

The central bank’s board had been adhering to a policy of keeping interest rates steady even at a time when most central banks around the world have cut their rates to the bone. The theory was that Norway’s economy has remained strong, and the bank wanted to keep rates at a level that would control inflation.

Central bank chief Øystein Olsen had stressed that rates would not be raised and last month opened up the possibility that the key policy rate “may be reduced.” The board has also said it had decided to keep the rate between 1.75 percent and 2.75 percent, so Wednesday’s cut brings it down to the bottom of that range.

Lower growth ahead
Several local economists had predicted the bank would cut rates, and some even guessed they’d be slashed by a half-point. Qvigstad defended the move as “appropriate,” noting that inflation remains low. Nor are they any signs that inflation will pick up in the near future.

Norway’s economy “remains robust,” in the words of the bank board, driven primarily by investments in the oil and gas industry and a “high level of housing construction.” Several indicators, however, suggest lower growth ahead, the bank warned, including a high degree of uncertainty regarding economic developments in coming months. The bank also noted that the level of debt in countries using the euro has led to “considerable problems in the European banking system and in money and credit markets.”

Norwegian banks, the board noted, have also experienced “more expensive and less accessible” market funding. It was initially unclear whether Wednesday’s rate cut would have any immediate effect on the rates commercial banks charge their customers in Norway, because they’ve been complaining of higher funding costs for several months. Some banks have raised rates, even when the central bank kept them steady.

By Thursday several banks had said they would not be lowering rates, including DNB, Handelsbanken, Nordea and Fokus Bank. They cited narrow margins already and blamed the euro crisis and uncertainty regarding access to finance themselves.

Views and News from Norway/Nina Berglund

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