“The bank is increasingly anxious about the impact that low oil prices will have on the economy, having trimmed their growth forecasts for mainland GDP for 2016 and 2017”, said economist Colin Bermingham from BNP Paribas. “The Board has therefore made a decision to lower the key policy rate now”, says Governor Øystein Olsen.
Markets have taken the view that the other major central banks were under growing pressure to do more after the Federal Reserve delayed a hike in interest rates last week due in part to a soft global outlook.
The Executive Board of Norges Bank on Thursday decided to cut its key rate to 0.75 percent from 1.00 percent. The USA currency traded as high as 8.49 krone to the dollar, its strongest level since April 2002, according to data from FactSet.
The Norwegian krone fell 2.3 percent on the news, falling below the Swedish krona to its lowest level since December.
“Growth in the Norwegian economy is likely to remain low for a longer period than projected earlier owing to the fall in oil prices through summer”, Olsen said.
Norges Bank has now cut its rate twice this year by a total of 50 basis points following a cut in June when it also warned that it could cut its rate in the second half of this year due to a deterioration in the economic outlook. “This was even more negative compared to what we had expected”.
Lower interest rates will do little to help alleviate Norway’s house price problem, which it acknowledged briefly in its statement. Several industries, not least tourism and the hotel business, are benefiting from the weak krone that takes some of the sting out of Norway’s notoriously high prices, and makes Norwegian goods and services more competitive.
Prior to this rate cut, the central bank last lowered rates in June but hinted at the possibility of further cuts this year. That clearly contributed to the quick depreciation of the krone, and more debt relief for borrowers.