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Friday, May 24, 2024

Key interest rate kept low and steady

Central bank boss Øystein Olsen capped off weeks of celebrating Norges Bank’s bicentennial by announcing Thursday that its executive board had decided to keep Norway’s key policy rate steady at 0.5 percent. The board indicated there simply were no major reasons to make any changes right now.

PHOTO: Berglund
Øystein Olsen, in a relaxed mood at the central bank’s bicentennial celebrations on Sunday, followed up on Thursday by announcing there would be no change in Norway’s key interest rate before the summer recess. Prospects remain for a rate reduction later in the year. PHOTO: Berglund

“The key policy rate forecast is little changed since the March Monetary Policy Report,” Olsen stated in a press release Thursday morning.

The vast majority of analysts hadn’t expected the bank to either raise or lower rates before its summer recess, when business activity in Norway slows in July. Uncertainty over the outcome of the British referendum on whether to leave the European Union (EU) also led to the speculation that Norges Bank would adopt a “wait and see” attitude.

Many economists and analysts have stated that a so-called “Brexit” (British exit from the EU) would weaken not only the British pound but the Norwegian krone as well. Since Norges Bank’s board earlier has cut interest rates down to the currently record-low level, analysts also have suggested that a British withdrawal from the EU could push Norway into a period of negative interest rates, especially if the board cut the key policy rate in advance.

The bank’s board did refer to the Brexit uncertainty in its statement on Thursday, released shortly after polls opened in Britain for the referendum on EU membership, but the board also noted that growth in the world economy is moderate and that oil prices have continued to rise in recent months. That has led to a strengthening of the Norwegian krone, although it remains volatile. The oil price rise is also expected to help stimulate Norway’s oil-fueled economy, making a stimulating interest rate cut unnecessary at present.

Olsen and the board cautioned, though, that Norway’s economic growth is “likely to remain weak in the coming perod, even though the upswing in oil prices may reduce uncertainty and push up demand somewhat.”

If the rapid rise in Norwegian housing prices also persists, household debt vulnerability may also rise. The board noted that inflation has been higher than the central bank’s desired level of 2.5 percent, but lower wage growth and a somewhat stronger krone would “weigh down” on inflation ahead.

Olsen concluded that prospects remain for a cut in the key policy rate later this year, and he even mentioned a possible cut from the stage at the central bank’s bicentennial celebration in Oslo on Sunday. The board won’t meet to re-evaluate interest rate levels, though, until early autumn. Berglund



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