Norway’s central bank board answered recent calls to lower interest rates on Thursday, in the face of what one economist called a “considerably weaker outlook for the Norwegian economy.” The quarter-point cut to 1,25 percent means the value of the Norwegian currency, the krone, will likely decline further as well.
It’s the first interest rate cut in nearly three years, and bank board boss Øystein Olsen suggested that Norges Bank’s “key policy rate” may be trimmed again over the next two years. Olsen, governor of Norges Bank, said the bank’s analysis “implies a key policy rate of 1.25 percent, or somewhat lower, in the period towards the end of 2016.” His remarks had immediate effect on the markets, and by late morning, it cost NOK 7.25 to buy one USD dollar. That’s up by nearly two full kroner from the level just over a year ago, meaning that Norwegian exports, at least, will be cheaper and more competitive while imports will be pricier.
Many analysts have worried that the recent dive in oil prices will end or at least suspend years of economic growth and vitality in Norway, and argued that lower rates are needed to stimulate spending and keep exports competitive. State statistics bureau SSB recently predicted that lower oil prices, which may continue to fall, will result in higher unemployment, reduced consumption, lower wage growth and an end to rapidly rising real estate prices.
Some think that’s healthy after the economic boom years that began with a rapid rise in oil prices.With North Sea crude now trading at around USD 65 a barrel, less than half its price a year ago, Norway’s oil-fueled economy has already been slowing down.
Marius Gonsholt Hov, chief economist at Handelsbanken, had told newspaper Aftenposten that he’d expected a quarter-point reduction in Norway’s key lending rate of 1.5 percent, which hadn’t moved since March 2012. Hov had support from other economists including Professor Steinar Holden at the University of Oslo and Professor Ragnar Torvik at the Norwegian University of Science and Technology (NTNU) in Trondheim. They told newspaper Dagens Næringsliv (DN) earlier this week that the weaker economic outlook boosts the case for lower rates.
“Half-a-year ago, we had the same interest rate while oil prices were 60 percent higher,” Torvik told DN. “The rate that was correct then is not correct now.”
The bank board seemed to agree, indicating that an interest rate cut was necessary not least because growth prospects for the Norwegian economy have weakened. The board stated that activity in the petroleum industry is “softening” and the “sharp fall in oil prices is likely to amplify this tendency.” That can have “spillover effects” on the wider economy and unemployment “may edge up ahead.” The central bank board didn’t seem to worry that lowering interest rates could boost inflation, noting that since the value of the krone has “depreciated markedly,” that helps “dampen the effects on the Norwegian economy and underpin inflation.”
Other economic experts, including the majority on a panel used by DN, had argued in favour of keeping rates steady. Professor Hilde C Bjørnland at the Norwegian Business School (BI), for example, said it would be enough for the bank board to send out a signal that it was postponing all interest rates increases for the foreseeable future, while Kjersti Haugland, senior economist at DNB Markets, argued against lowering rates because the current downturn still seems mostly limited to the oil sector.
Now Olsen and his colleagues at the central bank believe Norway’s key lending rate should lie at between o.75 percent and 1.75 percent until the next analysis of the economy is available in March, “unless the Norwegian economy is exposed to new major shocks.”