Norwegian Policy Rate Left at 2.25%

October 19, 2011

For the fourth straight time and as expected, the Norges Bank Executive Board left its policy interest rate at 2.25%.  Moreover, the policy bias was changed from tightening to neutral.  In June, officials had projected a likely rate range until October of 2.25-3.25%, but today’s statement identified the likely range between now and March 2012 to be 1.75 – 2.75%, that is symmetrically centered on the current rate level.  The new statement asserts that the most likely scenario is for the rate to increase again “in a year’s time” but that it’s equally possible for the rise to occur sooner (if prospects emerge for higher-than-assumed growth or inflation) or for policy to be eased “if the turbulence abroad intensifies and the outlook for growth and inflation weakens further.”  In defense of leaving the key rate at just 2.25%, the statement cites an “amplified and prolonged downturn” faced by advanced economies, “marked financial market turbulence and uncertainty,” and “low” domestic inflation.  Real GDP in 2Q11 was 0.4% lower than a year earlier, and CPI inflation in September was only 1.6%.

Although Norway had Europe’s first post-Great Recession rate increase back in October 2009, the current 2.25% level is only 100 basis points above the cyclical low of 1.25% from June 2009 to October 2009 and lies 350 basis points below the pre-recession cyclical high of 5.75%.  Norway’s second, third, and fourth policy tightenings were implemented in December 2009, May 2010, and May 2011.  The next and final key policy rate decision of 2011 is scheduled for December 14.

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



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