Norges Bank Cuts Benchmark Rate 50 Bps For Second Time This Month

October 29, 2008

The Norges Bank implemented its second half-percentage point benchmark rate reduction in two weeks. The one on October 15th was the Norwegian central bank’s first easing since a cut to 1.75% in March 2004. In increments of 25 basis points from mid-2005 until mid-2008 including twice in 2008 and seven times in 2007, the rate was lifted sixteen times to a cyclical high of 5.75%.  A bias to tighten was finally dropped on September 25th, three weeks before easing began. Today’s statement implies just 25 basis points of additional easing over the next five months but leaves the caveat that deeper rate reductions are possible if “new major shocks” arise. More likely than not given the world economic prognosis, officials will find a need to ease by more than 25 basis points between now and the end of the first quarter of 2009.

Bank officials are not sounding the all-clear on inflation and appear especially concerned about krone weakness and how such might boost expected inflation. The heavy up-front dosage of rate cuts at the start of easing was administered intentionally. Led by the Fed, central banks are predisposed these days toward a preference of front-loading stimulus but imposing restraint in a more gradual way. New forecasts from the central bank project a 1.25% drop in mainland final demand (that is, excluding the offshore oil industry) and a rebound of just 1.5% in 2010. Total GDP is forecast to rise 1.0% next year. The anemic pace of demand and activity, plus lower commodity prices, will alleviate inflationary pressure, but the moderation is expected to take some time. The CPI is projected to drop to an average of 3.0% next year and 2.75% in 2010.

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