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Tuesday, May 21, 2024

Still no change in key interest rate

Norway’s central bank (Norges Bank) seemed to follow the advice of a vast majority of local economists on Thursday in deciding to keep its key policy rate unchanged at 0.5 percent. The bank’s governor also suggested the rate was likely to remain steady, downplaying early predictions of another decline to stimulate the economy or even an increase to curb high housing prices.

There was zero change in Norwegian interest rates on Thursday, leading the krone to strengthen a bit. PHOTO:
There was zero change in Norwegian interest rates on Thursday, leading the krone to strengthen a bit. PHOTO:

“Our current assessment of the outlook suggests that the key policy rate will most likely remain at today’s level in the period ahead,” Øystein Olsen, governor of Norges Bank, stated Thursday morning.

It was the bank board’s first interest rate decision since before the summer holidays, and, as always, was watched closely by economists and the financial markets. The value of Norway’s krone quickly edged up on the news: On Wednesday it had cost NOK 8.30 to buy one US dollar, but within a half-hour of the interest rate announcement, a dollar cost NOK 8.13.

Four out of five Norwegian economists polled by newspaper Dagens Næringsliv (DN) this week had urged the bank board to keep interest rates unchanged. The reason, also reflected in the bank board’s own statement, was the mixed picture within the economy at present.

Unemployment has risen again, to 5 percent in July, after a few months of decline. It’s the highest level in 20 years and mostly reflects the abrupt decline in the oil and offshore industry fueled by lower oil prices.

Inflation, meawhile, has been “unexpectedly high” in recent months, the bank board noted, not least within the real estate market. “House price inflation has accelerated and been higher than projected,” according to Norges Bank. Low interest rates, the bank’s board conceded, may contribute to a “persistently high rate of increase in house prices,” and “increase the vulnerability” of the financial system.

“At the same time, there are signs that growth in the Norwegian economy is picking up at a slightly faster pace than projected in June,” the bank board stated. While growth remains moderate, capacity utilization is below “a normal level.” Low cost growth and a “somewhat stronger krone” indicates inflation “is likely to recede further ahead.”

The central bank, which aims to secure both price and financial stability in Norway, thus opted against either reducing the key policy rate yet again (which had been hinted earlier this year) or raising it to cool off the housing market. Analyses in its latest report even suggests that the key policy rate “will remain close to 0.5 percent over the next few years.”

That’s in line with the forecasts and remedies proposed by economists like Hilde C Bjørnland, a professor at the Norwegian Business School BI in Oslo. She told DN earlier this week that the current low interest rates contribute, together with a krone much weaker than just a few years ago, towards “dampening the negative ripple effects of the oil industry downturn.”

She had hoped the central bank would also signal that interest rates had bottomed out, but it didn’t go that far. Its own key policy forecast, in fact, “implies a slightly higher probability of a decrease than an increase in the key policy rate in the year ahead.” Berglund



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