Poor economy, low oil prices cause Norway to cut interest rate by 0.25 points to 1.25 per cent

HELSINKI – In a surprise move, Norway’s central bank on Thursday cut its key lending rate as it frets over the impact of the sharp fall in oil prices on the country’s economy.

In the first adjustment since March 2012, Norges Bank cut the rate by a quarter of a percentage point to 1.25 per cent.

Justifying the move, it said “activity in the petroleum industry is softening, ” as the sharp fall in oil prices over the past few months has raised concerns over the Scandinavian country’s economy, which is highly dependent on its huge oil and gas reserves — in 2013, oil and gas production accounted for 21 per cent of Norway’s economy.

Norges Bank said the sharp fall in oil prices “will have spillover effects on the wider economy and unemployment may edge up ahead.”

The rate cut surprised analysts, who said it came earlier than anticipated.

“We had expected the central bank to cut the rate but not at (today’s) meeting but during the first half of next year,” said Kyrre Aamdal at DNB Markets in Oslo. “The bank is a bit worried. It illustrates that they are taking early action to meet lower demands coming from the petroleum sector.”

Oil prices have plunged by more than 40 per cent since June, in part because of weak global economic growth and a U.S. oil boom that has swelled supply. Last month, OPEC failed to reach agreement on production curbs, mainly because of opposition from Saudi Arabia, and that decision has weighed on prices too.

DNB’s Aamdal said falling oil prices have yet to really dent Norway’s economy.

“So far, we have not seen any effects on the major part of the Norwegian economy except from oil suppliers which have reported declining activity,” he said “Most other industries report a modest growth in activity.”

The new interest rate comes into force Friday.