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Key policy rate reduced by 0.5 percentage point to 5.25 per cent

Norges Bank’s Executive Board decided today to reduce its key policy rate by 0.5 percentage point to 5.25 per cent with effect from 16 October 2008.

The Bank of Norway's (Norges Bank) Executive Board decided to reduce its key policy rate by 0.5 percentage point to 5.25 per cent with effect from 16 October 2008.

– The crisis in international financial markets has deepened and will therefore have greater effects on the Norwegian economy than previously assumed, says Governor Svein Gjedrem.

– Despite comprehensive measures by the authorities, the problems that arose in the US banking system have spread to most markets and countries, particularly after 15 September. Credit channels have dried up. The outlook for global economic growth next year has considerably worsened, says Governor Svein Gjedrem.

The supply of capital has also declined in Norway and it is more expensive and to some extent more difficult for banks, enterprises and households to obtain funding. Banks have increased their lending rates. Inflation remains high, but the forces that have fuelled inflation have now diminished.

– There is unusually high uncertainty surrounding developments ahead, says Governor Svein Gjedrem. It is difficult to comment on the likelihood of different outcomes. The most robust approach may therefore now be to implement measures to reduce the uncertainty and stave off particularly adverse outcomes for the economy. This implies a more active monetary policy than normal, both in interest rate-setting and through liquidity policy measures.

– The Norwegian authorities have implemented a broad range of measures to address the situation in money and credit markets. Norges Bank is monitoring developments closely and will continue to supply krone and dollar liquidity when it is appropriate to do so, says Governor Svein Gjedrem. The monetary policy meeting on 29 October will proceed as planned, and the Board will then also take a stand on the strategy ahead for the key policy rate.