Norges Bank keeps key policy rate unchanged; signals rate cut in September

As expected, the Norwegian central bank’s Executive Board today maintained the key policy rate at 0.5 percent. The Norges Bank’s forecast for the key interest rate, “the interest rate path” was a bit revised upwardly.

"The key policy rate forecast is little changed since the March Monetary Policy Report," said Norges Bank Governor Oystein Olsen.

The interest rate path from March’s Monetary Policy Report had showed a chance of 30 percent that the central bank would cut rates at June’s meeting. Moreover, it had showed a full rate cut in September and a possibility of 20% to lower in 2017 to zero percent. The rate path from today’s meeting still shows a possibility for lowering the key interest rate to 0.25 percent in September.

However, the central bank raised the lowest point of the interest rate path to 0.25 percent from 0.20 percent, signifying that there is no possibility of a rate cut to zero in the path, said DNB in a research note. The rate path was pulled down by lower interest rates abroad, a stronger NOK and lower wage growth.

In its Monetary Policy report, the Norges Bank mentioned that low interest rates and constant high house prices increase the financial instability risk. According to the Norwegian central bank, lower interest rates might lead to financial system vulnerabilities, possibly setting of or augmenting an economic downturn. It stated that the risk of a rise in property price inflation and debt growth increases when interest rates are low. In its statement, the Norges Bank mentioned that if the “rapid rise in house prices persist, household vulnerabilities may increase and heighten the risk of an abrupt fall in demand further out”.

Meanwhile, the central bank stated that global economic growth is moderate. It noted that financial markets have been marked by the uncertainty regarding the outcome of UK’s EU referendum. It also noted that the NOK has been firmer than expected.

On the country’s economic growth front, the Norges Bank stated that the economy is expected to remain subdued in the coming months even if the recovery in oil prices might lower the uncertainty and slightly boost demand. The central bank mentioned that inflation has remained higher than 2.5 percent for a certain period; however, lower wage growth and a slightly firmer NOK might weigh down on inflation. The central bank’s rate path indicates a reduction of rate in September and that it will be the last cut.

"There are still prospects that the key policy rate may be reduced in the course of the year," added Governor Olsen.