Norway signals further easing as it cuts again

Norway's central bank cut its key rate by 25 basis points to 0.75% today, with a view to imposing another similar sized cut later this year.

Norges Bank cited weaker growth forecasts as a key motivation for the move, on the back of lower-than-expected oil prices and investment.

Inflation, excluding energy products and adjusted for tax changes, is running at 3% in Norway, but the headline figure is projected to drop to 2% by 2018, offering the central bank space to ease policy.

Governor Øystein Olsen said "the key policy rate may be reduced further in the coming year", while the executive board added that, under its current outlook, it would likely be reduced to "just above 0.5% in 2016".

The move resulted in the krone depreciating by 2.7% against the euro, suggesting it was not expected. Joachim Bernhardsen, an analyst for Nordea, said his team "had not expected Norges Bank to cut rates" in a public note.

Since June, the krone has slid against the euro, falling by 8.8% to date. The executive board noted the exchange rate pass through "appears to be stronger than expected", lifting inflation. It expects the currency to appreciate "somewhat" but still remain weaker than predicted in June.

A decline in demand for labour has lead the bank downwardly revising its wage growth figures, which will work to restrain inflation, as it ultimately will reduce the demand for goods and services.

The central bank predicts annual CPI inflation to reach 2.75% in 2016, before declining to 2% by 2018. Conversely, GDP rates are set to climb steadily from 1.25% at the end of this year to 2.5% at the end of 2018.

"Growth prospects for the Norwegian economy have weakened, and inflation is projected to abate further out," said the governor.

The central bank now has to perform a balancing act; in lowering the key rate, it remains wary of fuelling property price inflation and debt growth.