Norway Central Bank In Surprise Rate Cut

Norway’s central bank cut its main interest rate on Thursday and even hinted at the possibility of negative rates ahead to support a weakening economy, in comments that sent the crown to a 13-year low against the dollar.

The crown also slid 3 percent against the euro as markets were taken aback by the extent of the bank’s easing bias.

“It is a new era for the Norwegian economy. We are no longer in a league of our own,” Governor Oeystein Olsen told a news conference, adding that the bank did not even discuss keeping rates on hold.

Olsen raised the prospect of rates turning negative in future when he told a news conference that the bank’s reserve rate, a less important instrument than the policy rate, had been set to minus 0.25 percent for the first time.

The central bank has been caught between the need to cool down a red-hot property market and the need to support the slowing economy.

But oil and gas firms, which generate a fifth of the economy’s output, have been cancelling investments and laying off thousands of workers, preparing for an extended period of low crude oil prices.

“I am pretty sure that we will end up with about the same rate levels as our neighbours, meaning we will have negative deposit rates at Norges Bank. This will be in 2017-2018,” said Eika chief economist Jan Andreassen, referring to Denmark and Sweden.

Only six of the 18 economists polled by Reuters had expected a rate cut. The other 12 had all seen the bank keeping its main rate at 1.00 percent.

“They cut the rate and are now saying that most likely there will be another cut before Christmas and most likely another cut in 2016,” said Frank Jullum, chief economist at Danske Bank Markets. “This was even more negative compared to what we had expected.”

The central bank said growth in the economy was likely to remain low for a longer period than projected earlier owing to the fall in oil prices through the summer.

It cut its growth forecasts, seeing GDP for the mainland – excluding offshore oil – falling to 1.25 percent next year, below its June forecast for 1.5 percent growth in 2016.

Lower interest rates will do little to help alleviate Norway’s house price problem, which it acknowledged briefly in its statement.

“House price inflation has been a little higher than projected, albeit with wide regional dispersion. Household debt has continued to grow at a faster pace than income,” it said.

Reuters

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