PARIS (MNI) – The central bank of Norway cut its key policy rate by
50 bps to 1.75% on Wednesday, citing concerns about the slowing global
economy and troubled financial markets.

“The turbulence in financial markets has intensified and external
growth is now expected to be clearly weaker, particularly in the euro
area. In order to dampen the impact on the Norwegian economy, the
Executive Board has decided to lower the key policy rate,” Deputy
Governor Jan F. Qvigstad said in a statement.

Norges Bank held rates steady at its last four meetings but
Wednesday’s rate cut had been widely expected by analysts, as the
central bank hinted in October that it could cut rates if financial
market conditions and the global growth outlook continued to deteriorate
and if other central banks cut their rates. Some analysts had expected
Norges Bank to cut rates by only 25 bps.

The central bank said the rate decision was made against the
backdrop of a possible recession in the Eurozone.

“Growth prospects for most advanced countries have receded,” the
central bank said. “The risk of a renewed recession within the euro area
has increased markedly. Current economic indicators point to an imminent
slowdown in Europe.”

Since October the European Central Bank has cut its key policy rate
twice by 25 bps, from 1.5% to 1.0%.

Norges Bank said that consumer price inflation had been slightly
lower than projected. Underlying inflation is projected to range between
1.0% and 1.5%, the bank said.

“In order to guard against an economic setback and even lower
inflation, we are of the view that a reduction in the key policy rate is
now appropriate,” Qvigstad said.

The bank also noted increasing funding problems in the banking
industry and the possibility of a credit crunch.

“Market funding has also become more expensive and less accessible
for Norwegian banks. Banks are expected to tighten lending standards for
households and enterprises,” the central bank said. “Market participants
now expect premiums to remain high in the period ahead.”

“The krone has remained stable despite mounting turbulence,” it
noted.

The central bank reminded that at its october meeting, the
executive Board had decided that the key policy rate should be in the
interval 1.75% to 2.75% until the Monetary Policy Report on March 14
“unless the Norwegian economy is exposed to new major shocks.”

–Paris newsroom, +331-42-71-55-40; paris@marketnews.com

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