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Saturday, June 15, 2024

No increase in interest rates

There’d been some speculation that the executive board of Norway’s central bank would raise interest rates at its last meeting of the year on Thursday, but board members kept their key policy rate unchanged at 0.5 percent. Now it looks even more likely it will stay there for the foreseeable future, or even decline.

Norway's new 100-kroner note, like others in its series, will combine a tradition illustration of maritime-related subjects on one side and a modern "pixel design" on the other. PHOTO: Norges Bank
The price of money in Norway, which will soon feature maritime-related themes and a modern “pixel design” on new currency rolling out next year, looks likely to remain low, according to the central bank. PHOTO: Norges Bank

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

Even though oil prices have risen, housing prices are at record high levels and some of Norway’s trading partners are raising interest rates, the board Olsen heads opted against any increase itself. The board cited “changes in the outlook for inflation and capacity utilization” as implying “a somewhat lower key policy rate in the coming years.”

That means Norwegian interest rates are likely to remain low and may even dip. The board noted that Norway’s currency, the krone, had also “appreciated more than expected,” even though it had weakened against the US dollar Thursday morning, which cost as much as NOK 8.60 compared to as low as NOK 8.30 in recent weeks. Within minutes of the central bank’s announcement on interest rates, the krone strengthened slightly and one US dollar was costing around NOK 8.55.

The bank’s executive board noted that economic activity in Norway is picking up “at a somewhat slower pace than projected in September,” when there was speculation that interest rates might rise to ward off higher inflation. The board noted that lowering the key policy rate to stimulate economic activity, however, “increases the risk of a further acceleration in house price inflation and debt accumulation.”

In the end, the board decided it was best to sit still in the proverbial boat for now. Recent economic development simply didn’t warrant any change in interest rates, although some banks have raised rates themselves in the midst of an overheated real estate market.

“The risk of a build-up of financial imbalances and the uncertainty surrounding the effects of a lower key policy rate now suggest a cautious approach to interest rate setting,” the bank stated. New analyses “suggest that the key policy rate will remain close to 0.5 percent in the coming years,” it added, but with an intriguing statement at the end of its press release on Thursday: “At the same, the key policy rate forecast implies a slightly higher probability of a decrease rather than an increase in the key policy rate in the year ahead.” That reflects recent predictions among Norwegian employers, not least within the troubled offshore industry, that 2017 will be tougher than 2016. No major economic upturn is expected before 2018-2019. Berglund



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