As broadly expected Norges Bank lowered its rates today by 25bp to 0.5% and lowered the rate path to a bottom of 0.2% in Q1 2017. This indicates that there is a “100%” possibility that the central bank will further lower rates and a 20% chance for a rate cut to zero during its December meeting. There is one-third probability that Norges Bank will lower rates during June meeting and a 100% chance that it will lower by September. The central bank cut the bottom of the rate path by 18bp as compared to the rate path of December.
The central bank has sent slightly mixed signals to the market. On one hand it hints that it will go further and the bottom in the rate path is possibly below expectations, while on the other had it says that it will move slowly.
Norges Bank stated that lower interest rates might increase financial system vulnerabilities. It added that as the key rate comes close to a lower bound, there is an increase in the uncertainty surrounding the effects of monetary policy. This implies “proceeding with greater caution interest rate setting”. The central bank also stated that it is doubtful regarding moving rates to negative. But it said that if the Norwegian economy is exposed to new major shocks, board will not exclude the likelihood of moving rates into negative territory.
