The board of Norway’s central bank once again defied the predictions of economists and analysts by refusing on Thursday to further reduce its already record-low key lending rate. A cut had been widely expected as a means of easing an ever-more visible slowdown in the Norwegian economy.
Øystein Olsen, governor of Norges Bank, nonetheless announced that the bank’s executive board had decided to keep the bank’s “key policy rate” unchanged at 1.25 percent. That’s because they viewed developments in the Norwegian economy as being “so far … broadly in line” with projections in March, when the bank also refused to lower rates in a decision that surprised many.
Krone regained strength
“On the basis of an overall assessment, the executive board decided to keep the key policy rate unchanged at this meeting,” Olsen said. The Norwegian currency, the krone, immediately strengthened on the news as it has in recent weeks when oil prices rose from the winter’s low levels. By late morning, it only took 7.35 kroner to buy a US dollar, compared to nearly 8.4 in March.
The central bank board’s decision was linked to factors including economic growth among Norway’s trading partners that was described as “still moderate.” Inflation, according to the bank, remains “very low in many countries.”
Meanwhile, consumer price inflation in Norway “is close to 2.5 percent,” the bank board noted, and a recent rise in the unemployment rate was “expected.” Several economists had urged an interest rate cut because of the recent rash of jobs disappearing in the oil sector, a result of sharply lower oil prices. Others noted how labour unions and employers agreed on “moderation” this year, meaning that very few Norwegian workers are getting pay raises that provide any real income growth. A cut in interest rates, they argued, would thus offset that and provide some economic stimulus.
Cut may come in June
The bank board clearly disagreed, at least for now. They conceded this year’s wage settlements suggest that wage growth “may be somewhat lower than projected,” but also argued that “oil prices have increased and household demand remains buoyant. House prices continue to rise and household debt has increased more than expected.”
Olsen hinted that the bank’s key lending rate may nonetheless be cut before the summer holidays: “From the information we have received recently, there are still prospects that the key policy rate will be lowered in June.” Economists are likely to fume if it isn’t.
“When the economy has developed only a bit weaker than expected, there’s no reason to wait,” Steinar Juel, chief economist at Nordea Markets, had told newspaper Aftenposten before the bank’s announcement came. He was among those expecting a reduction on Thursday, and who now must wait at least another month.