Norway Lowers Benchmark Rate to 2.5% to Revive Growth

By Johan Carlstrom

Feb. 4 (Bloomberg) -- Norway’s central bank cut the benchmark interest rate by half a percentage point to help revive the economy of the world’s fifth-largest oil exporter as it faces stagnation.

Norges Bank reduced the overnight deposit rate to 2.5 percent, it said on its Web site today. Twelve of 13 economists surveyed by Bloomberg had forecast the half-point cut, while one had expected a 1 percentage-point reduction.

“The downturn in the Norwegian economy may be deeper and more prolonged than Norges Bank has assumed,” Governor Svein Gjedrem said in a statement. “Inflation may in turn become too low. This would then indicate that the interest rate should be cut further. On the other hand, the key policy rate has already been reduced considerably.”

The mainland economy, which excludes shipping and oil, faces contraction for the first time in 20 years, according to Nordea Bank AB, the biggest Nordic lender. As receding demand restrains inflation, the central bank has turned its focus to galvanizing the economy and signaled last year it will cut rates from a two-year low after slashing them by 2.25 points last quarter.

The krone gained 1 percent against the euro to trade at 8.9038 as of 2:46 p.m. in Oslo.

“There’s nothing that indicates that Norges Bank has changed its views on future rate cuts,” said Kyrre Aamdal, an economist at DnB NOR ASA in Oslo. The central bank reiterated its view from December that the key rate should be between 2 percent and 3 percent until its next rate decision on March 25.

‘Considerable Uncertainty’

There’s “considerable uncertainty” surrounding the economic outlook, Gjedrem said in the statement. “Expectations of low and stable inflation now make it possible to use monetary policy actively.”

Norges Bank will probably cut the key rate by half a point in March and the same again in May, Aamdal said. That compares with the central bank’s rate path, which indicates a 0.25 percentage point cut in March or April and another 0.25 point cut in June, he said.

Norway’s $330 billion economy, home to StatoilHydro ASA, risks faltering this year as global growth stalls, sapping demand for oil. Global economic expansion will slow to 0.5 percent in 2009, the weakest level since World War II, the International Monetary Fund said on Jan. 28.

Central banks are cutting borrowing costs across the world in an effort to resuscitate their economies and ease access to credit. In the U.S., the Federal Reserve targets a key rate as low as zero percent, while the European Central Bank reduced its main rate to 2 percent on Jan. 15, matching a record low.

Contract

Sweden lowered its benchmark rate by 1.75 points to 2 percent on Dec. 4, the biggest reduction since 1992. In Denmark, the central bank, which pegs the krone to the euro, has cut by 2.5 points since October to 3 percent.

Norway’s mainland economy will contract 0.5 percent in 2009, DnB NOR ASA, the country’s largest bank, said last month. Norway probably entered a recession last quarter, Norges Bank said on Dec. 17.

Underlying inflation, which adjusts for energy and taxes, slowed to 2.6 percent in December from 2.7 percent in November, Statistics Norway said on Jan. 9. Average inflation will be slower than the central bank’s 2.5 percent target this year and next, Nordea estimates.

The government on Jan. 26 announced a stimulus package that, together with measures presented last year, amounts to 2.3 percent of gross domestic product. Government spending and tax cuts will boost the mainland economy by 0.75 percentage point this year, it said.

The central bank lowered its key rate by 1.75 percentage points last month after cutting it by a percentage point in two separate moves in October.

To contact the reporter on this story: Johan Carlstrom in Stockholm at jcarlstrom@bloomberg.net;