Norwegian Benchmark Interest Rate Kept at 2.0% But Statement Less Dovish

September 22, 2010

Similar to decisions at the prior two meetings on June 23 and August 11, the Norges Bank retained a 2.0% interest rate but gave a stronger signal of its intent to resume a normalization of rate levels.

  • The statement in June said that further rate increases would be needed later than previously envisaged and mentioned coming fiscal restraint.
  • The statement in August again defended keeping rates low for now but added that such should then be normalized gradually.
  • Today’s statement reiterates the need for normalization, fails to explicitly call for low rates in the near term and instead just says that household debt has not risen in response to the low rate levels and that house price inflation remains moderate.

Today’s statement does observe that inflation is somewhat lower than the 2.5% target and that financial markets, though stable, still face uncertainty.  The preventive justification for rate normalization is that the Norges Bank needs to be able to respond to future financial market shocks should such arise.  Norwegian real GDP in the second quarter was 0.6% greater than in 2Q09, but the jobless rate is only 3.3%.

Norway’s interest rates were reduced aggressively during the world recession in seven front-loaded steps from October 2008 to June 2009.  The first three moves in 4Q08 totaled 275 basis points from 5.75% to 3.0%.  The cyclical low of 1.25% was maintained from June 2009 until late October that year.  Norway was the first European country to get a post-recession rate increase, a 25-bp move on October 28 followed by hikes of similar size on December 16 and May 5 of 2010.  The next Executive Board meeting at the Norges Bank is scheduled for October 27. 

Copyright Larry Greenberg 2010.  All rights reserved.  No secondary distribution without express permission.



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