Global Investor

Why Norway did not cut interest rates

Rukmini V | Updated on January 24, 2018 Published on June 07, 2015


Norway seems more resilient to the oil price fall than peers

The fall in crude oil prices has not only dented the fortunes of countries in West Asia but also that of Norway, one of the five Scandinavian countries.

The oil and natural gas sector constitutes around 22 per cent of Norway’s GDP and 67 per cent of trade exports. Due to low oil price, its GDP growth has taken a hit — it fell to 0.2 per cent in the first quarter of 2015, compared with 0.5 per cent in the same period in 2014. The GDP growth for 2015 was lowered to 1 per cent from the earlier forecast of 2.1 per cent.

With no respite in oil prices, analysts expected the country’s central bank to cut rates in May 2015. Rates were reduced by 25 bps in December 2014 to 1.25 per cent. But to the surprise of many, Norges Bank held rates steady.

Improving inflation

One reason why rates were untouched was the comfort from inflation. Consumer prices increased in April 2015 by 0.4 per cent in April, compared with a 3 per cent rise in March 2015. Consumer price index for April 2015 was at 139.3 and is expected to inch up to 139.52 in May 2015.

The inflation rate in Norway stood at 2 per cent as of April 2015 and is forecast to be around these levels in 2015. The country’s central bank has a target rate of 2 per cent.

Favourable currency

Low interest rates have hit the country’s currency, which has been tumbling since May 2014. The krone has lost nearly 25 per cent against the US dollar in the last year.

However, the weak currency is helping Norway’s exports. Foreign trade amounts to 37 per cent of Norway’s GDP. Its total exports, primarily with the EU, include sea food, metals and shipping equipment. The country’s balance of trade is expected to remain favourable. Also, in August 2014, Russia had banned agricultural exports from Norway to retaliate against sanctions placed on it by western countries. But these bans were lifted recently, benefiting Norway.


One of the noteworthy points about Norway is that sovereign borrowings from credit institutions such as the World Bank or IMF are minimal.

The sovereign wealth fund, where the surplus wealth produced by Norwegian petroleum income is deposited, make Norway rank third in the world in the list of oil assets (after the UAE and Singapore) with $656 billion in assets from the oil sector.

Norway’s sovereign wealth fund, managed by the Norges Bank, returned 5.3 per cent (401 billion krone or $53 billion) in the first quarter of 2015, the highest ever quarterly return in krone terms. These positive factors have likely boosted investor optimism. The Oslo Stock Exchange index gained 6 per cent in the last one year and currently trades at about 26 times its trailing earnings.

Key issues

However, fall in oil price is raising concerns such as unemployment. The country was ranked fourth among the top five countries in the world with a 3.3 per cent rate of unemployment in February 2014.

But it has increased to 4.1 per cent as of March 2015. The share of long-term unemployment (those without a job for over 26 weeks) also zoomed — to 38 per cent in the first quarter of 2015 from 29 per cent in the same period a year ago, according to data from the Labour Force Survey.

The central bank has promised to consider lowering interest rates, if needed. Analysts believe there is a 50 per cent chance of further rate cuts this year.

Published on June 07, 2015
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