Norges Bank decided to cut the key policy rate to 1.75 per cent in Wednesday Executive Board meeting. The central bank said that the growth expectations have clearly weakened with economic indicators pointing to an imminent slowdown or even recession. There are considerable problems in the European banking system, money and credit markets with borrowing costs on the rise for the banks in Norway as well. Banks have also tightened lending requirements towards individuals and entities and Norges Bank foresees Norwegian money market premiums to remain high.
While the economic outlook in Norway has tamed, high construction activity and strong growth in petroleum-related industries offsets some of that decline. Many of Norway’s exporters are in trouble and some high profile job cuts and factory closures have been announced lately. While the unemployment remains lows, these news undoubtedly weighed in for the decision even if it was not stressed in banks communiqué. The Eksportfinans situation has been another drag for the exporters.
Economists weren’t surprised by this decision, only the magnitude was in question. ECB has cut rates twice in quick succession and Norges Bank does not want the rate difference against the Euro area to grow too large. Inflation expectations remain low despite robust economic activity. Norges bank sees “even lower” inflation as something to guard against and currently projects 1-1.5% CPI increase. The Krona initially lost close to 0.9% against the Euro but halved that retreat in late session.
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