Norway Cuts Benchmark Rate by Half Point to 4.75%

By Tasneem Brogger

Oct. 29 (Bloomberg) -- Norway's central bank cut the benchmark interest rate by half a percentage point for the second time this month and forecast further reductions as it slashed its forecast for economic growth next year.

The bank reduced the overnight deposit rate to 4.75 percent, the lowest in a year, it said on its Web site today. The decision was expected by 10 of 14 economists surveyed by Bloomberg. Two expected a quarter-point cut and two forecast no change.

``The effects of the financial crisis will most likely be more pronounced than envisaged only recently,'' bank Governor Svein Gjedrem said in the statement. ``The slowdown in the Norwegian economy appears to be occurring rapidly and is likely to be pronounced.''

The banking crisis, falling home prices and higher borrowing costs have sapped consumer demand and undermined economic growth, even in oil-rich Norway. The benchmark stock index has slumped 54 percent this year and the krone lost almost 4 percent against the euro in September. The central bank cut its growth forecast for next year to 0.25 percent from a June prediction of 2 percent.

``They're obviously acknowledging that growth is going to be a lot lower'' than previous estimates, said Sunil Kapadia, an economist at UBS Ltd. in London. ``But they're indicating they're going to make sure the downside to the currency from rate cuts isn't too great.''

The bank expects the key rate to be cut to 4.25 percent next year and 3.75 percent in 2010. Gjedrem said policy makers had considered cutting the rate by a quarter point today.

Weak Krone

``The krone exchange rate has depreciated substantially,'' Gjedrem said. ``Should the krone remain weak for a long period, inflation may remain high. Norges Bank is closely monitoring developments in the krone exchange rate.''

The krone gained 0.7 percent against the euro to 8.519 as of 2:45 p.m. in Oslo. Against the dollar, the krone gained 1.7 percent to 6.646. The benchmark index of Norway's biggest traded companies was trading up 4.1 percent.

``The rate cut will ease the situation for companies and households with debt and help stimulate activity in the economy,'' Finance Minister Kristin Halvorsen said in a statement. ``This however requires that banks' lending rates also decline.''

The mainland economy, which excludes oil and shipping, will expand 2.5 percent this year, compared with a June forecast of 3.25 percent growth, the bank forecast. The economy expanded 6.2 percent in 2007. The bank still sees underlying inflation at 2.5 percent this year, and raised its forecast for price growth in 2009 to 3 percent from 2.25 percent previously.

Bank's Balance

The Oslo-based central bank is seeking to address the slowing economic expansion while monitoring the impact of a weaker krone, which threatens to speed up inflation. Consumer-price growth has remained above the 2.5 percent target for the last three months.

Norges Bank cut the key rate on Oct. 15 by half a point from a five-and-a-half-year high. That followed a coordinated rate cut from the Federal Reserve, the European Central Bank and four other central banks on Oct. 8 in an effort to ease the economic effects of the worst financial crisis since the Great Depression.

Still, investment in energy-related industries means the central bank is unlikely to cut rates as much as other banks, according to SEB Enskilda. Norway is the world's fifth-largest oil exporter.

``The very high level of investment in the oil sector will add stimulus to the rest of the economy next year, even though the current low oil price will result in somewhat slower investment growth,'' Stein Bruun, chief economist at SEB Enskilda, said in a note to clients before the announcement.

Inflation, adjusting for energy and taxes, accelerated to 3.1 percent in September, while the overall consumer price gauge jumped 5.3 percent, the most in 20 years, Statistics Norway said on Oct. 10.

The government said on Oct. 12 it will offer commercial banks as much as 350 billion kroner ($55.4 billion) in government bonds in exchange for mortgage debt to restore confidence in the financial system. Banks will be able to use the notes as collateral to borrow funds.

To contact the reporters on this story: Tasneem Brogger in Copenhagen at tbrogger@bloomberg.net;