Norway’s central bank joined the growing number of nations with interest rates at the lower bound by cutting its benchmark rate for the third time this year to 0.0 percent.
Norges Bank (NB) surprised economists by cutting its benchmark interest rate by a further 25 basis points and has now cut it 1.50 percentage points this year following two unscheduled rate cuts in March.
“Low interest rates cannot prevent the coronavirus outbreak from having a substantial impact on the Norwegian economy, but can help dampen the downturn,” NB said.
It added economic activity has “fallen abruptly” due to the pandemic and uncertainty about future developments is “unusually high.”
The the fall in crude oil prices will lead to a sharp drop in petroleum investments in coming years and has also weakened the krone’s exchange rate to record lows, forcing the NB to buy 3.5 billion krona to ensure the foreign exchange markets functioned smoothly.
Oeystein Olsen, governor, said he expected the policy rate to remain at this level for some time and the bank’s monetary policy and financial stability committee did not expect further rate cuts.
As containment measures are eased, Olsen expects economic activity to pick up with low interest rates supporting a faster rebound and reducing the risk of unemployment becoming entrenched at a high level.
However, he added it will likely take time time for output and employment to return to pre-Covid-19 levels.
Norway’s krona hit a record low of 10.8 to the U.S. dollar on April 22 but has since then gained some strength and rose further today to 10.23, still down almost 14 percent this year.
“In an environment of low oil prices and uncertainty about the impact of the coronavirus outbreak, the krone is expected to remain weak throughout the projection period,” NB said in an update to its quarterly monetary policy report.
The krona’s depreciation will tend to boost inflation temporarily while a rise in oil prices will also trigger higher consumer prices.
Norway’s inflation rate fell to 0.7 percent in March, the lowest since September 2012, and NB lowered its forecast for inflation this year to average 1.2 percent from the March forecast of 1.2 percent and then rise to 2.2 percent in 2019.
In 2021 inflation is seen jumping to 3.4 percent, sharply up from an earlier forecast of 0.4 percent, and then 2.5 percent in 2022, up from a previous 0.0 percent.
Norway’s mainland economy is forecast to contract by 5.2 percent this year, down from the March forecast of 5.6 percent and 2019’s 2.4 percent growth. Next year the economy is seen rebounding and expand 3.0 percent, up from the previous forecast of 1.7 percent, and then further to 3.3 percent in 2022.
The policy rate is forecast to average 0.4 percent this year, up from the March forecast of minus 0.6 percent, and then remain at 0.0 percent throughout the projection period through 2023.
The central banks with policy rates at zero or below include Bulgaria, the European Central Bank, Japan, Switzerland, Denmark and Sweden
Central banks with policy rates at effectively the lower bound – 0.25 percent or below – include the United States, Canada, Australia, Israel, New Zealand, Peru, Fiji, Samoa, the U.K and the Czech Republic.
Norges Bank released the following press release:
“Norges Bank’s Monetary Policy and Financial Stability Committee has unanimously decided to reduce the policy rate to zero percent.
The outlook and the balance of risks imply a very expansionary monetary policy stance. In March, the policy rate was reduced from 1.5 to 0.25 percent. At the monetary policy meeting on 6 May, the Committee decided to reduce the policy rate to zero percent.
