Norway's central bank on Thursday cut its key interest rate to a record low one percent to counteract the impact of lower oil prices on the economy, and warned of a possible further cut. "Developments in the Norwegian economy have been slightly weaker than expected and the economic outlook has deteriorated somewhat. The board has therefore decided to reduce the key policy rate now," central bank governor Oystein Olsen said in a statement.
The quarter-point cut was widely expected, as the bank had signalled it would lower the rate before the summer. It warned there could be another rate decrease within a few month. "The current assessment of the outlook for the Norwegian economy suggests that the key policy rate may be reduced further in the course of autumn," Olsen said.
The Scandinavian country, whose oil sector represents more than 20 percent of gross domestic product, has suffered from an almost 40 percent drop in oil prices since June 2014. With oil companies reducing their investments, more than 20,000 jobs have disappeared in the sector since January 2014, according to DNB Markets.
Earlier this week oil giant Statoil announced it would eliminate up to 1,500 jobs, or about seven percent of its workforce by the end of 2016. Norwegian unemployment is currently at 4.1 percent, its highest level in 10 years, while inflation and wage hikes remain below the central bank's targets. The bank has forecast growth of 1.25 percent in 2015 and 1.5 percent in 2016.
Despite the mediocre outlook, the bank also has to contemplate a sharp rise in housing prices and record high household debt, which are fuelling fears of a boom-and-bust cycle that would have devastating effects. The government this week announced measures aimed at toughening up conditions for commercial banks' mortgages, and higher capital buffer requirements. As a result, it is "not certain" that commercial banks will pass on the rate cut to their customers, SpareBank 1 Gruppen economist Elisabeth Holvik said.