By CentralBankNews.info

Norway’s central bank rolled out three measures to cushion the impact of the coronavirus on the country’s economy, including cutting the policy rate by 50 basis points, pumping in liquidity by offering 3-month F-loans, and slashing the countercyclical buffer for banks.

Norges Bank (NB), which has kept rates on hold after pausing in September 2019 after four rate hikes to stem rising inflation, lowered its policy rate to 1.0 percent in the first rate cut since March 2016, and said it was ready to make further rate cuts.

“A lower policy rate cannot prevent the coronavirus outbreak from having a substantial on the Norwegian economy, but it could dampen the downturn and mitigate the risk of more persistent effects on output and employment,” NB said.

NB is the fifth central bank to cut its rate at an extraordinary policy meeting since the U.S. Federal Reserve’s surprise rate cut on March 3.

“There is considerable uncertainty about the duration and impact of the coronavirus outbreak, with a risk of a more pronounced economic downturn. The Committee is monitoring developments closely and is prepared to make further cuts,” NB said.

In the near term, NB said economic activity will decline considerably due to the outbreak of the coronavirus, or Covid-19, and many firms are already feeling the effects, with layoffs beginning and unemployment is expected to rise.

“Economic prospects have also weakened on the back of the sharp fall in oil prices,” it added.

Recent volatility in financial markets has boosted the risk premiums in Norway’s money market sharply and NB said it would offer extraordinary 3-month F-loans for as long as necessary to ensure its policy rate passes through to money market rates.

NB regularly offers short-term fixed rate lending and deposit facilities, known as F-loans and F-deposits, to manage liquidity.

From today NB will offer F-loans at the current policy rate and they will be fully allotted so banks receive the desired volume. New 3-month auctions will be held at least every week for the next four weeks.

In order to withdraw any surplus liquidity, NB said it would issue daily F-deposits with a one-day maturity and banks can then draw on the liquidity from the F-loans on a daily basis.

Lastly, NB said it had advised the country’s finance ministry to slash the countercyclical capital buffer for banks to 1.0 percent from 2.5 percent with immediate effect.

It added the ministry had followed this advice.

In Norway the countercyclical buffer is set once a quarter by the finance ministry under advice from the central bank.
In response to the global financial crises, banking supervisors worldwide devised capital buffers as a way to strengthen the capital basis of financial institutions and mitigate the procyclical effects of banks’ normal lending practices.

During good economic times, banks build up their buffers and during economic downturns these buffers can be lowered and capital drawn upon if credit becomes harder to obtain.

“Norwegian banks are solid,” NB said, adding they have sufficient capital to absorb losses but a lowering of the countercyclical capital buffer can counteract any tightening of banks’ lending standards, which can amplify an economic downturn.

NB added it didn’t expect the finance ministry to raise the buffer again until the first quarter of 2021 at the earliest.

Norges Bank released the following three statements, one on its policy decision, a second on the countercyclical buffer and a third on extraordinary F-loans to banks:

“Norway is contending with the outbreak of coronavirus (Covid-19). The most important measures to address the consequences of the outbreak are those that limit contagion and save lives.