Norges Bank cuts interest rates by 25 basis points

Norway’s central bank has cut its main interest rate and hinted at possible negative rates ahead to support a weakening economy.

The country is Europe’s largest oil producer and naturally smarting thanks to the collapse in the price of black gold.

In its statement announcing the move, the bank said it now believed that Norway was about to go into a longer period of slow growth than it had previously believed.

However, a weaker krone would push inflation – which stood at 2.9 percent in August – even higher in the short term. Professor Hilde C Bjørnland at the Norwegian Business School BI cautioned in newspaper Dagens Næringsliv (DN) on Wednesday that another rate cut would only “fire up” the housing market even more at a time when prices already are extremely high.

“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”, he added. “Interest rates should be held steady”, she advised. The weaker krone, on the other hand, “will contribute to strengthening the profitability of export and import-competing firms”. “They cut the rate and are now saying that most likely there will be another cut before Christmas and most likely another cut in 2016”, said Frank Jullum, chief economist at Danske Bank Markets. As for the domestic economy, the Norges bank declared that the domestic economy was expanding in-line with previous estimates, helped along by the rapid depreciation in the value of the krone.

Norge Bank Gov. Oystein Olsen said the board opted to lower its key policy rate by a quarter percent to 0.75 percent as a result of sluggish growth.