Norges Bank likely to ease policy on subdued growth outlook

Norway’s central bank, Norges Bank, is banking on an expansionary monetary policy, owing to subdued growth outlook. The Norwegian central bank has cut its key interest rate by 100 basis points to current 0.5 percent since the end of 2014. After it lowered the rate in March, it signalled for additional rate cut in the second half of 2016. Moreover, it did not exclude the possibility of lowering rates to negative if required.

With this, the Norges Bank has acknowledged that inflation would surpass the target rate of 2.5 percent for some time. For instance, inflation rate already reached 3.4 percent in May. Consumer prices excluding energy and adjusted by tax effects has been above the central bank’s target rate since mid-2015. Recently it reached 3.2 percent.

The weak NOK is mainly pushing inflation upwards. The Norwegian krone has depreciated markedly since the autumn of 2014, thanks to declining oil price and the central bank’s key rate cuts. The weak krone has made imports costly.

This, in turn, has hit the consumer prices. Meanwhile, the weak currency assists in driving through the Norwegian economy’s structural changes in a bid to lower the country’s reliance on the oil and gas sector, noted Commerzbank in a research report.

Last month, the central bank hinted again at additional rate cut, possibly in September, because of the subdued outlook for growth. According to the Norges Bank, the weak economy and appreciation of NOK might bring inflation back towards the target rate.