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Krone jumps as Norges Bank removes easing bias

Norway’s central bank has become the latest to tentatively signal an end to its years of accommodative monetary policy, removing guidance that it could cut rates this year.

The Norwegian central bank kept its interest rates on hold after its latest monetary policy meeting, as was widely expected.

However, the executive board followed the European Central Bank in removing its easing bias. Governor Øystein Olsen said “the balance of risks suggests that the key policy rate will remain at today’s level in the period ahead”.

Joachim Bernhardsen at Nordea said the change to the bank’s interest rate forecast “should be hawkish to markets”, and the krone jumped after the news – at publication time the currency was 0.5 per cent stronger against the euro.

Economists had been split on the likelihood of a change, with SEB noting this morning that a weak inflation outlook could mean it is “too early” to reduce the likelihood of a cut.

However, as SEB has previously pointed out, Norges Bank is considering lowering its inflation target to reflect long-term changes in government spending from oil revenues, which would make the current below-target inflation rate a less immediate worry.

At 0.5 per cent, Norway’s benchmark interest rate is already much higher than most of its European peers, and its economy has also seen limited benefits from the recent economic upturn.

Its exposure to low oil prices has weighed on the wider economy, which briefly entered recession last year and expanded by only 0.2 per cent in the first quarter.

However, the country’s “mainland economy” – excluding oil and gas – has been performing well, and Norges Bank’s executive board said today that it now expects economic growth to be “somewhat higher than projected earlier”.

The board was also encouraged by stronger growth among Norway’s trading partners, and increased its forecasts for trading partners’ GDP growth this year.

Although it acknowledged that inflation was lower than it had expected, the board said “increased activity and receding unemployment suggest that inflation will pick up”.

Second chart via Nordea