Norway’s central bank slashed its key interest rate to a new record low on Thursday, citing the weaker economic outlook, and said that the rate may be cut further this year. The bank also said that the policy rate could turn negative if the economy is exposed to new major shocks.
The Executive Board of the Norges Bank reduced the key policy rate by 25 basis points to 0.50 percent. The decision was in line with economists’ expectations.
The bank cut the key policy rate twice last year. The most recent reduction was a quarter-point cut in September.
“Growth prospects for the Norwegian economy have weakened somewhat and inflation is expected to moderate further out,” Norges Bank Governor Oystein Olsen said.
“The current outlook for the Norwegian economy suggests that the key policy rate may be reduced further in the course of the year,” the central bank chief added.
The central bank expects Norwegian unemployment to rise and wage growth to be lower this year than in 2015.
The krone depreciation has pushed up consumer price inflation, the bank noted. However, the expectation is that inflation will drift down once the effects of the krone depreciation starts to unwind.
Norges Bank cautioned that lower interest rates could increase financial system vulnerabilities. Further, the uncertainty surrounding the effects of monetary policy is set to increase as the key policy rate approaches a lower bound, the bank said.
“This now suggests proceeding with greater caution in interest rate setting,” the bank said in a statement.
“Should the Norwegian economy be exposed to new major shocks, the Executive Board will, however, not exclude the possibility that the key policy rate may turn negative.”
In the Monetary Policy Report, released on Thursday, policymakers assessed that the key policy rate would drop to about 0.25 percent at the end of this year. Towards the end of the projection period in 2019, the key policy rate is projected to increase to close to 0.75 percent.
“With such a path for the key policy rate, the analysis suggests that inflation will stay close to 3 percent in the near term before gradually falling to between 1.5 percent and 2 percent in 2019,” the report said.
The material has been provided by InstaForex Company – www.instaforex.com