Norwegian Monetary Policy Requires a Balancing Act

August 10, 2011

The Norges Bank, Norway’s central bank, did not raise its policy interest rate of 2.25% even though that level is “low” and the last full review in June projected the key rate would lie between 2.25% and 3.25% between then and October.  The explanation for today’s decision is contained in a statement that speaks of intensifying global uncertainties and world financial turbulence and a cresting of commodity inflation.  The bank’s Executive Board, which targets medium-term CPI inflation at 2.5%, observes that while Norwegian economic growth remains “solid,” inflation has been a little less than expected, with core CPI hovering between 1.25% and 1.5%. Officials aren’t backing away from the view that positive and robust growth in domestic demand warrants a gradual increase in interest rates but are balancing that directional baseline strategy with the reality of weaker global growth and financial market turbulence that justify delaying the next rate increase and permitting rates to climb more slowly than if those developments had not occurred.

During the Great Recession, the key interest rate was reduced seven times from a pre-October 2008 high of 5.75% to a low of 1.25% after mid-June 2009.  The deepest move of 175 basis points was implemented in December 2008.  The Norges Bank was Europe’s first central bank to subsequently start normalizing its rates, lifting the key rate by 25 basis points in October 2009 and twice more by that amount in December 2009 and May 2010.  Policy restraint was then paused for a year until a fourth hike in May of this year, and that was the last change.

The next interest rate policy decision will be announced September 21.  The following meeting on October 19 will be accompanied by a full review.

Copyright 2011, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.



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