Norway central bank cuts rates in surprise move, eyes further reduction

By Terje Solsvik

OSLO (Reuters) -Norway's central bank cut its policy interest rate by 25 basis points to 4.25% on Thursday, its first reduction since 2020 and with more to come later this year, in a decision that took most analysts by surprise and weakened the currency.

"The economic outlook is uncertain, but if the economy evolves broadly as currently projected, the policy rate will be reduced further in the course of 2025," Norges Bank said in a statement.

The Norwegian crown had weakened to 11.55 against the euro by 0823 GMT, from 11.48 just before the announcement.

Norges Bank had held its interest rate last month at 4.50%, the highest level since 2008, after it postponed in March a long-planned monetary easing due to an unexpected rise in consumer prices.

Of the 26 economists in Reuters' June 11-16 poll, 23 had forecast that Norges Bank's key interest rate would stay at 4.50% on Thursday, while only three predicted a cut to 4.25%.

"Inflation has declined since the monetary policy meeting in March, and the inflation outlook for the coming year indicates lower inflation than previously expected," Norges Bank Governor Ida Wolden Bache said in a statement.

"A cautious normalisation of the policy rate will pave the way for inflation to return to target without restricting the economy more than necessary," she added.

Core inflation in Norway eased more than expected in May, slowing to 2.8% year-on-year, but remained above the central bank's 2.0% target.

The rate decision comes ahead of a parliamentary election in September, with latest polls suggesting that the minority Labour government may be re-elected.

In a rare public statement after a rate decision by the central bank, Prime Minister Jonas Gahr Stoere welcomed the move.

"It is heartening news that Norges Bank cuts rates today," Stoere told news agency NTB. "This is especially good news for everyone with loans."

The Norwegian policy stance has so far contrasted with other Western central banks, most of which started cutting rates last year as growth slowed and inflation waned.

Neighbouring Sweden cut its policy rate on Wednesday by a quarter point to 2.0% citing economic weakening, while the U.S. Federal Reserve kept rates steady. Both central banks said they may further reduce borrowing costs later this year.

Britain's central bank is expected to keep interest rates on hold later on Thursday.

(Reporting by Terje SolsvikEditing by Gwladys Fouche and Gareth Jones)