Norway cuts interest rates and warns it might go negative

Norway’s central bank, Norges Bank, has cut interest rates to record lows, with warnings that they could go into negative territory in a bid to revive the economy following the crash in oil prices.

The country’s benchmark interest rate was cut by 25 basis points to 0.5% on Thursday, and is expected to fall to 0.2% going into 2017 [1].

Øystein Olsen, Governor of the Bank, said: “Growth prospects for the Norwegian economy have weakened somewhat, and inflation is expected to moderate further out” [1].

“The current outlook for the Norwegian economy suggests that the key policy rate may be reduced further in the course of the year” he added [1].

The decision was made despite the Bank admitting that the move could increase “financial system vulnerabilities” due to “the uncertainty surrounding the effects of monetary policy”. Although it said it would now proceed with “greater caution” when setting future policies [2].

Economic growth has slowed in Norway, with unemployment at its highest level in a decade. By contrast, housing prices are increasing swiftly, causing concern among some economists as borrowers take advantage of record low rates to make higher bids for properties [2].

The cut follows European Central Bank Chief, Mario Draghi’s, move to push the deposit rate to -0.4% last week, showing how central banks are struggling to encourage stagnant economies [3].

However, the Norwegian krona rose by 0.6% against the euro following the announcement [1].

[1] Telegraph. ‘Norway cuts interest rates and warns they could turn negative’.
[2] Financial Times. ‘Norway cuts borrowing costs and refuses to rule out negative rates’.
[3] Business Insider. ‘Norway cuts its interest rate to 0.5% and said it might go negative’.