Norway cuts key interest rate, suggests it could go negative

AP News
|
Posted: Mar 17, 2016 10:05 AM

HELSINKI (AP) — Norway's central bank reduced its key rate by a quarter of a percentage point to a record low of 0.50 percent and indicated Thursday that it could cut it further, even into negative territory.

Norges Bank said the cut in the rate it charges on banks' overnight deposits at the central bank was sparked by weaker growth both in Norway and around the world as well as falling interest rates worldwide — a host of banks have been cutting interest rates recently, including the European Central Bank, in order to combat the bleaker economic environment.

"Growth prospects for the Norwegian economy have weakened somewhat and inflation is expected to moderate further out," Governor Oystein Olsen said in a statement. "The current outlook for the Norwegian economy suggests that the key policy rate may be reduced further in the course of the year."

Though the bank warned over the threats facing the oil-rich country in light of the fall in oil prices, it said increasing uncertainty over the effects of monetary policy suggested the need to proceed "with greater caution" when setting rates.

"Should the Norwegian economy be exposed to new major shocks, the executive board will ... not exclude the possibility that the key policy rate may turn negative," it said.

The prevailing view in the markets is that the bank, which has been cutting interest rates for the best part of a year-and-a-half, will follow up Thursday's reduction with another one later this year, possibly as soon as June.

Capital Economics' European economist Jack Allen cautioned that investment in the offshore sector will continue to fall this year — by about as much as 15 percent — and that would have knock-on effects on overall demand despite an anticipated recovery in oil prices.

"But it would probably take some time for cancelled projects to be re-commissioned," he said.

Among its predictions, the central bank said unemployment is likely to rise slightly and that a falling national currency — the krone — would see inflation pressures to build.