Norges Bank has now cut its rate twice this year by a total of 50 basis points following a cut in June when it also warned that it could cut its rate in the second half of this year due to a deterioration in the economic outlook.
In today's statement, central bank Governor Oeystein Olsen said the rate cut was decided because growth prospects had weakened and inflation was expected to decline further.
Norway's economic growth is likely to remain low for longer than expected due to the fall in oil prices in recent months. This will lead to a further decline oil-related investments and lower demand from the petroleum industry in other parts of the economy.
While the depreciation of the krone currency has pushed up inflation, Olsen said low wage growth is keeping down costs and inflation will then subside as the effects of the lower Norwegian crown unwind.
Norway's crown currency normally tracks oil prices and it has been steadily depreciating since last summer when oil prices started to decline.
In response to today's decision by the central bank, the crown plunged to 8.48 to to the U.S. dollar from around 8.27 yesterday to be down 12 percent this year.
Norway's inflation rate rose to 2.0 percent in August from 1.8 percent in July, below the bank's 2.5 percent target.
Norges Bank issued the following statement
"Norges Bank's Executive Board decided to lower the key policy rate by 0.25 percentage point to 0.75 percent.
“Growth prospects for the Norwegian economy have weakened, and inflation is projected to abate further out. The Board has therefore decided to lower the key policy rate now”, says Governor Øystein Olsen.
Growth in the Norwegian economy is likely to remain low for a longer period than projected earlier owing to the fall in oil prices through summer. Oil investment is expected to fall to a further extent than projected in June, and lower demand for goods and services from the petroleum sector will reduce activity in other parts of the economy. On the other hand, a weaker krone will contribute to strengthening the profitability of export and import-competing firms. Unemployment is projected to continue to edge up.
House price inflation has been a little higher than projected, albeit with wide regional dispersion. Household debt has continued to grow at a faster pace than income.
The krone depreciation has pushed up consumer price inflation. Low wage growth is keeping down cost growth, and inflation will edge down as the effects of the krone depreciation unwind.
“The current outlook for the Norwegian economy suggests that the key policy rate may be reduced further in the coming year”, says Governor Øystein Olsen."
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