How will Norway's shock interest rate cut affect your finances?
What has changed?
Norges Bank, Norway's central bank, announced that it is reducing its policy rate by a quarter point from 4.5 percent to 4.25 percent, following a unanimous decision of its Monetary Policy and Financial Stability Committee on June 18th.
This marks the first cut in the interest rate in five years. While other central banks have reduced interest rates, Norges Bank has stuck fast to its 4.5 percent rate since December 2023.
In a press conference, the bank said that the cut was the start of "a cautious normalisation of the policy rate", with the rate likely to be cut again over the next six months, probably in September and December, ending the year at just under 4 percent.
In her press conference, the bank's governor Ida Wolden Bache conceded that the bank had not yet reached its 2 percent inflation target, but said that other economic considerations also needed to be taken into account.
"The job of getting inflation back to target is not complete. But we believe the time has now come to ease the brakes a little."
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What will the change mean to mortgage rates?
Norway's largest bank, DNB, immediately followed the announcement with a quarter-point cut to its mortgage rate, taking the standard rate to 5.24 percent.
Its competitors Nordea and SpareBank1 Sør-Norge followed shortly afterwards with their own cuts.
This will bring welcome relief to homeowners with large mortgages.
In six weeks' time, according to a
calculation by Norway's public broadcaster NRK
, a family with a 4m kroner mortgage will be paying about 800 kroner less a month in interest before tax.
"It's gratifying that Norges Bank is reducing rates today," Norway's prime minister Jonas Gahr Støre, wrote in a post on Facebook. "This is especially good news for everyone who has a mortgage."
However, in the press conference Bache said that she did not expect mortgage lenders to pass through all of the future cuts the bank is planning.
The bank expects the average mortgage rate to fall from 5.6 percent today to 4.6 percent in 2028.
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What will the cuts mean for property prices?
Lower interest rates, and the prospect of still lower rates in the future, are likely to further push up the price of apartments and detached houses in Norway as buyers calculate they will be able to afford the payments on larger loans.
What will the change mean for Norwegian krone exchange rates?
The krone has been steadily strengthening against the US dollar since the start of this year, dropping from close to 11.5 kroner to the dollar to around 9.8 earlier this week. After the rate cut was announced it shot back to about 10 kroner.
This is good news for people who live in Norway but who are paid in dollars or euro, bringing an effective pay rise.
It is an effective pay cut, however, for foreigners living in Norway and earning in kroner, meaning any money sent to relatives or savings accounts outside Norway will be worth less.
The weakening of the krone will also make it more expensive for people living in Norway to travel abroad, especially to the eurozone. A euro, worth only 8.13 kroner in 2014, is worth 11.55 kroner, up from 11.44 before today's announcement.
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What will the cuts mean for inf
lation?
The
inflation rate in May was 3 percent
, still well above the bank's 2 percent target, although the bank said in its announcement that, excluding energy prices, inflation had been "lower than expected" in recent months.
The bank said that it expected restrained wage growth to pull the inflation rate back towards 2 percent even with the rate cuts.
In his Facebook post, Gahr Støre, said the government could take some credit for the decision to cut rates, as could Norway's unions.
"The government has led a responsible and safe economic policy, and the working parties [unions and employers] have agreed on responsible wage settlements, so that price growth can continue to go down and help lay the foundation for interest cuts."
There is a risk, however, that the central bank has miscalculated and that by cutting rates too early, it will allow inflation to start to rise again.
Kjetil Storesletten, Professor of Economics at the University of Minnesota, said that he believed the bank was moving too soon to cut rates.
"
I think this was early. They probably thought that the Norwegian krone would finally strengthen. I expect that there will be a weak krone, and that there will be inflationary pressure in Norway," he
told the TV2 broadcaster
.
With record low unemployment and oil money being spent, he believes that inflation will bounce back.
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