Norway’s central bank left its key interest rate unchanged at zero on Thursday after a surprise cut in May and signaled that it is set to remain at the current level over the next few years.
The Monetary Policy and Financial Stability Committee unanimously decided to keep the policy rate unchanged at zero percent, Norges Bank said in a statement. That was in line with economists’ expectations.
In May, the rate was cut from 0.25 percent after a cumulative 125 basis points reduction in two extraordinary sessions in March from 1.50 percent.
“The Committee’s current assessment of the outlook and balance of risks suggests that the policy rate will most likely remain at today’s level for some time ahead”, Norges Bank Governor Oystein Olsen said.
“The policy rate forecast implies a rate at the current level over the next couple of years, followed by a gradual rise as economic conditions normalise,” Norges Bank said.
The central bank said activity has picked up faster than expected since its May policy session.
Unemployment has fallen more than anticipated and oil prices have risen, the bank said. However, activity remains substantially lower than at the start of the year.
“There is considerable uncertainty surrounding the path to recovery,” the bank said.
Low interest rates are helping to accelerate the return to more normal output and employment levels and thus, reduce the risk of unemployment becoming entrenched at a high level and of inflation becoming too low further out.
That said, a long period of low interest rates could increase the risk of a build-up of financial imbalance, the bank pointed out.
In the Committee’s assessment, the outlook and balance of risks imply a very expansionary monetary policy stance, the Norges Bank said.
The central bank also advised the Ministry of Finance to keep the countercyclical capital buffer rate for banks unchanged at 1.0 percent.
The rate was lowered from 2.5 percent to 1.0 percent in March.
A lower buffer rate reduces the risk that tighter lending standards could amplify an economic downturn, the central bank said.
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