Norway Unexpectedly Trims Key Rates; Hints At Further Cuts

Norway's central bank unexpectedly lowered its key policy rate by a quarter point as fall in oil prices dampened economic growth, and suggested that further reduction may be forthcoming in the coming year.

The Executive Board of Norges Bank decided to cut its key rate to a record low 0.75 percent from 1.00 percent. The bank was widely expected to leave its rates unchanged on Thursday.

This was the second reduction in interest rates so far this year. The bank last reduced the rate in June, when it cut policy rate by 25 basis point.

Governor Øystein Olsen said the current outlook for the economy suggests that the key policy rate may be reduced further in the coming year.

Jack Allen, a European economist at Capital Economics, expects an interest rate cut of 0.5 percent could come in the second quarter of next year.

The scope for rates to undershoot the Bank's forecasts is smaller than in the past, but he said he would not be surprised to see further rate cuts later in 2016.

"Growth prospects for the Norwegian economy have weakened, and inflation is projected to abate further out," Olsen said.

Mainland Norway expanded at a slower pace in the second quarter largely due to the weakness in industries supplying the petroleum industry. The economy grew only 0.2 percent from the first quarter.

According to the central bank, economic growth is likely to remain low for a longer period than projected due to falling oil prices. Oil investment is also forecast to fall more than estimated in June. Unemployment is also expected to continue to rise.

At the same time, 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 governor said.