Norway’s key interest rate unchanged despite ‘lower’ economic activity

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The executive board of Norway’s central bank, Norges Bank, announced on Thursday that it had decided once again to keep its “key policy rate” unchanged at 1.5 percent despite recent signs of an economic downturn. The rate hasn’t changed since spring of last year, and now may remain at its current level through next year.

Norges Bank’s governor, Øystein Olsen, said that economic analyses “suggest that the key policy rate be kept lower than projected earlier. There are prospects that the key policy rate will remain at the current level, or somewhat lower, in the year ahead.”

Rates likely to stay low through 2014
In the short term, the bank board decided to keep it between 1 percent and 2 percent at least until publication of its next report on September 19, “unless the Norwegian economy is exposed to new major shocks.”

Earlier prognoses from the central bank had suggested no changes in the key interest rate until March of 2014. Norwegian Broadcasting (NRK) reported that time frame had been adjusted until the end of 2014.

Olsen noted that Norwegian economic activity “appears to be lower than anticipated earlier. On the other hand, inflation has been slightly higher than projected and the krone has depreciated somewhat.” Those were the main factors behind the board’s decision to neither raise nor lower the key policy rate.

The bank board also said interest rates abroad are “very low” while households and businesses in Norway face “a substantial spread” between the bank’s key policy rate of 1.5 percent and the rates charged by many commercial Norwegian banks.

Commercial banks’ rates much higher
Led by Norway’s biggest bank, DNB, most Norwegian banks collectively raised lending rates on home mortgages, for example, last winter, claiming they needed to boost their reserves to meet new state requirements. The unpopular move sparked protests from borrowers and Norway’s finance minister, Sigbjørn Johnsen, who said it was unnecessary and claimed the profitable banks had no grounds to blame the state for their decision to raise rates.

Many borrowers are now paying around 4 percent for adjustable rate mortgages, well above the central bank’s key lending rate, but most felt they had few options. DNB’s move prompted most of its competitors to quickly follow their lead and seize the opportunity to raise rates as well.

That may slow further inflation that could prompt a central bank rate hike. The central bank’s quarterly report noted that growth prospects for both Norway and the global economy have “weakened slightly” and wage growth in Norway had slowed. “There are prospects that it will take longer for inflation to move up towards the inflation target,” the bank reported.

Views and News from Norway/Nina Berglund

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