September 28, 2015

At its 24 September monetary policy meeting, Norges Bank (NB) decided to cut its sight deposit rate by 0.25 percentage points to a record low of 0.75%, marking the third rate cut since the precipitous fall in crude prices last year. The Bank also left its countercyclical capital buffers for banks unchanged. The interest rate cut surprised analysts who had expected the NB to leave the policy rate unchanged as further rate cuts could increase inflationary pressures, which are already being strengthened by a weaker krone. By cutting the policy rate, the Bank has signaled that it is placing more weight on spurring economic growth rather than on targeting inflation in the short term. The Bank last cut rates at its June 2015 meeting, when it reduced the deposit rate from 1.25% to 1.00%.



In its statement, NB stated that growth prospects were weaker than expected as oil prices continued to flounder at their current historically-low levels during the summer months of 2015. This has led the NB to forecast a more protracted period of lower investment in Norway’s oil sector beyond what was expected at the June monetary policy meeting. The impact on the oil sector is making its way to other parts of the economy, producing heterogeneous performance across sectors, with some commercial-oriented industries reporting decreasing output, while others have reported growth. However, effects on the real economy from declines in energy sector investment are being felt in the labor market. The NB expects unemployment to continue its steady increase in the coming months.



Regarding inflation, the NB stated that inflation had been higher than expected in the June policy report and attributes much of the discrepancy to a weaker krone. Further depreciations in the krone will lift inflation in the coming months as well. This is offsetting lower expected wage growth, which will continue to curb inflation after the effects of the weaker currency have dissipated. This had led the Bank to target longer run inflation with its rate cut decision. The Bank admitted that this approach has the potential to fuel property price inflation, noting that, “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.” The NB noted that this consideration was taken into account in its decision-making process.



The Bank also lowered its projected path of interest rates in the coming years. NB Governor Øystein Olsen reinforced this possibility by adding that, “the current outlook for the Norwegian economy suggests that the key policy rate may be reduced further in the coming year.” The next policy meeting is scheduled for 5 November.

FocusEconomics Consensus Forecast panelists expect the sight deposit rate to be at 0.89% at the end of 2015. In 2016, the panel sees the key policy rate rising to 0.94%.