Norges Bank maintains key rate at 0.5pct, may cut policy rate in course of 2016

The Norwegian central bank maintained its benchmark rates at 0.5%, on par with expectations. The Norges Bank did not introduce any new rate path but mentioned that it will continue with its March’s report. According to the central bank, “the Executive Board indicated that the key policy rate may be reduced further in the course of the year. On the whole, developments since March have not deviated substantially from the projections in the March Report”. The rate path of March provided a 100% chance for reduction of rate in September.

The central bank’s assessment report stated that “inflation remains elevated, but a stronger krone may contribute to a slightly more rapid decrease in inflation than projected in March. On the other hand, the rise in oil prices may reduce uncertainty and contribute to somewhat higher growth in the Norwegian economy. An overall assessment of new information indicates that the key policy rate should be kept unchanged at this meeting.”

Meanwhile, Norway’s mainland GDP figures were also released today. The first quarter growth figures were slightly more solid than the central bank and consensus projections. Mainland GDP for Q1 2016 expanded 0.3%, more than Norges Bank’s expectations of 0.15% and consensus projection of 0.2%.

Electricity production contributed 0.3 percentage points to the GDP growth. Electricity production is volatile and the central bank does not take it into consideration while judging capacity utilization. Corrected for electricity production, the economic growth was almost zero on average in the first quarter of this year and the last quarter of Q4.

This suggests that growth is slightly weaker than forecast of central bank. Meanwhile, demand in the mainland grew 0.5% q/q; however, a sharp decline in mainland export pulled down. Also, Norway’s employment was up 0.1% in Q1 2016 after declining by 0.1% in Q4 2015.