Norway holds rate but greater uncertainty going forward

August 15, 2019

By CentralBankNews.info

Norway’s central bank kept its policy rate steady at 1.25 percent, saying the outlook for the policy rate ahead is little changed since June, when it forecast another rate hike would be likely this year, but acknowledged “the global risk outlook entails greater uncertainty about policy rates going forward.”

Norges Bank (NB), which raised its rate in June for the third time since September 2018 to contain inflation from strong economic growth, added the upturn in the Norwegian economy was continuing as it had expected though underlying inflation was a little lower than projected and “deepening trade tensions and heightened uncertainty surrounding the UK’s relationship with the EU may weigh on growth abroad and in Norway.”

“On the other hand, a weaker krone may contribute to higher inflation ahead,” NB added, waking a tightrope between inflation close to its target and a strong domestic economy amid a weaker currency and slowing global growth.

NB’s decision to retain its rate today was widely expected by analysts who said the bank’s executive board normally doesn’t change rates during an interim meeting, pencilling in the next rate hike for September when NB updates its quarterly economic forecast.


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Propelled by an investment boom in its oil and gas industry, and government spending on infrastructure, such as railways, Norway’s economy has defied the slowdown in the global economy and the central bank has remained an outlier amid a sharp easing of global monetary policy.

Recalling its latest monetary policy report on June 20, NB said capacity utilization in the country’s economy was somewhat above normal, underlying inflation was a little higher than the bank’s 2.0 percent target and the board’s assessment was the “policy rate would most likely be increased further in the course of 2019.”

In response, analysts expected NB to raise its rate again in September or December, when it publishes its economic forecasts, with only a minority looking for NB to end its tightening campaign.
While today’s guidance from NB was balanced, the verdict from the foreign exchange market was one-sided, with Norway’s krone continuing its recent decline.
The krone fell 0.3 percent to 8.99 to the U.S. dollar in response to the NB’s statement and is now down 3.2 percent this year and down by 8.8 percent since the start of 2018 despite three rate hikes.
Norway’s headline inflation rate was steady at 1.9 percent in July and June while gross domestic product shrank 0.1 percent in the first quarter from the previous quarter for annual growth of 2.5 percent, up from 1.9 percent in the previous quarter.
In its June monetary policy report NB forecast its policy rate would average 1.1 percent this year, then 1.6 percent in 2020 and 1.7 percent in 2021 and 2022.

But NB also lowered both its inflation and growth forecasts from its March forecasts.

Consumer price inflation was seen averaging 2.2 percent this year, down from a previous forecast of 2.3 percent, then 1.9 percent in 2020 and 2.0 percent in 2021 and 2022.

The 2019 growth forecast for mainland Norway was lowered to 2.6 percent from a previous 2.7 percent and the 2020 forecast to 1.9 percent from 2.0 percent. In 2021 growth was seen slowing further to 1.2 percent and then remaining at that rate in 2022.

Norges Bank published the following press release:

 

“Norges Bank’s Executive Board has decided to keep the policy rate unchanged at 1.25 percent.
In Monetary Policy Report 2/19, which was published on 20 June 2019, the Executive Board’s assessment was that capacity utilisation in the Norwegian economy was somewhat above a normal level. Underlying inflation was a little higher than the 2 percent inflation target. The policy rate was raised by 0.25 percentage point to 1.25 percent. The Executive Board’s assessment of the outlook and balance of risks suggested that the policy rate would most likely be increased further in the course of 2019.
The upturn in the Norwegian economy is continuing broadly as expected in June. Underlying inflation has been a little lower than projected. Deepening trade tensions and heightened uncertainty surrounding the UK’s relationship with the EU may weigh on growth abroad and in Norway. On the other hand, a weaker krone may contribute to higher inflation ahead.
“Overall, new information indicates that the outlook for the policy rate for the period ahead is little changed since the June Report. The global risk outlook entails greater uncertainty about policy rates going forward”, says Governor Øystein Olsen.”