Norway’s volatile currency, the krone, immediately strengthened against the US dollar and other currencies Thursday morning, after the country’s central bank opted against lowering interest rates once again. Norges Bank’s key policy rate was kept at the still record-low level of 0.75 percent.
Thursday’s krone rebound came after a rollicking night during which it had weakened considerably against the US dollar. At one point, it looked like it would cost NOK 9 in order to buy one US dollar, largely because the US’ own central bank had raised its key interest rate for the first time since 2006. That made the US dollar worth much more against currencies all over the world.
After trading as high as NOK 8.87 early Thursday morning, though, the krone regained value after Norges Bank’s executive board announced its interest rate decision. By mid-morning, it cost NOK 8.71 to buy a dollar, a significant strengthening in the currency exchange rate sphere. It also cost less than NOK 13 to buy a British pound.
Bank board defied analysts’ predictions
A majority of analysts polled by Norway’s business newspaper Dagens Næringsliv (DN) had predicted that the bank board would lower rates once again, by a quarter-point to 0.50 percent. They cited Norway’s weakening economic outlook caused largely by the sharp downturn in the oil and gas sector as a result of relatively low oil prices. Norway’s North Sea crude oil dipped well under USD 40 a barrel this week, creating more trauma in an industry that had become accustomed to oil price levels of over USD 100.
The international agreement to control global warming, which will require major cuts in worldwide carbon emissions, also threatens the future of fossil fuels even though Norwegian officials seem to be doing all they can to shield the country’s oil and gas industry while still trying to maintain a climate- and environmentally friendly image. The jobs generated by the industry remain vitally important for Norway’s economy, and unemployment is already rising to uncomfortably high levels.
The central bank’s board, however, opted to keep the key lending rate that it had lowered in September unchanged at 0.75 percent. The move came even though the board acknowledged how the effects of the fall in oil prices and decline in oil investment were “gradually becoming evident,” and that household consumption and private sector investment will likely also be “lower than previously projected.”
Rate cut may come next year
The board believes, however, that “expansionary fiscal policy will support demand for goods and services.” Prospects for growth are “somewhat weaker than anticipated” and “unemployment is expected to rise slightly more than projected,” the board stated, but members of Norges Bank’s board didn’t think that justified another reduction in interest rate levels now.
The expansionary fiscal and monetary policy, the board reasoned, is supporting a restructuring of the Norwegian economy. A lower key policy rate, the board stated, could “increase the risk of a more rapid rise in real estate prices and debt.” Uncertainty over how even lower interest rates would affect Norway’s economy prompted the board to adopt a “cautious approach” in setting interest rates.
Norges Bank Governor Øystein Olsen didn’t rule out an interest rate cut next year though. “If economic developments are broadly in line with projections, the key policy rate may be reduced in the first half of 2016,” Olsen stated.