Rate effective from 8 May 2020:

• Policy rate: 0.00 %
• Overnight lending rate: 1.00 %
• Reserve rate: -1.00 %

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Press telephone: +47 21 49 09 30
Email: presse@norges-bank.no

Activity in the Norwegian economy has fallen sharply owing to the coronavirus pandemic. The uncertainty surrounding developments ahead is unusually high. Low interest rates cannot prevent the coronavirus outbreak from having a substantial impact on the Norwegian economy, but can help dampen the downturn. This reduces the risk of a more prolonged impact on output and employment.

Norges Bank’s Monetary Policy and Financial Stability Committee decided to reduce the policy rate from 1.5% to 0.25% in March. At the monetary policy meeting on 6 May, the Committee decided to reduce the policy rate to 0%. The Committee does not envisage making further policy rate cuts.

Sharp global downturn and very low oil prices

The coronavirus outbreak and containment measures have thrown the global economy into a severe economic downturn. Unemployment has increased markedly. Fiscal measures have been introduced in many countries to alleviate the situation. Central banks have cut policy rates and taken extensive measures to stabilise financial markets. Market-implied rates indicate very low rates among our trading partners for a long time ahead.

The sharp global downturn has led to a marked contraction in global oil consumption and low oil prices. Total oil production is substantially higher than consumption, with little spare storage capacity. Against this background, oil prices are likely to remain low in the coming period. Futures prices indicate that oil prices will pick up in the years ahead.

 

There has been considerable financial market volatility in the wake of the coronavirus outbreak both abroad and in Norway. Equity indexes have declined, and bond risk premiums have risen. Premiums in the Norwegian money market rose rapidly up to mid-March. Partly reflecting high risk premiums, the policy rate cut in March did not result in a corresponding reduction in interest rates facing firms and households. Like other central banks, Norges Bank has taken a range of measures to improve market liquidity and to ensure that a lower policy rate passes through to money market rates and bank lending rates. Money market volatility has recently abated, and money market and bond premiums have fallen.

Lower oil prices and uncertainty about the economic fallout of the outbreak have weakened the krone exchange rate. On 19 March, the krone hit record-weak levels against a number of currencies. At that time, uncertainty in the NOK market was particularly high and limited liquidity contributed to amplifying NOK movements. In order to support a well-functioning NOK market, Norges Bank has made extraordinary NOK purchases totalling NOK 3.5bn in the foreign exchange market.

 

 

Abrupt and deep downturn in the Norwegian economy

In order to contain the spread of coronavirus, on 12 March the Government introduced the most far-reaching measures seen in Norway in peacetime. The coronavirus outbreak and containment measures have led to production halts and lower activity across a range of businesses. Large parts of the economy have been affected. Many employees have been furloughed or made redundant. In recent weeks, restrictions have been eased. A gradual reopening of society will lead to a rebound in economic activity.

Petroleum investment will show a pronounced decline in the coming years. Oil companies have cut investment plans in the face of the oil price decline. Demand for Norwegian export firms has fallen sharply, reflecting both a sharp contraction among our trading partners and a drop in foreign tourists.

The authorities have deployed extensive measures to dampen the economic fallout of the coronavirus outbreak. Financial support is being provided to prevent bankruptcy of viable businesses and to alleviate the situation of households that have suffered a loss of income.

Norwegian banks are solid. Banks’ credit losses have increased recently, but solid profitability enables banks to absorb large credit losses. On the advice of Norges Bank, the Ministry of Finance reduced the countercyclical capital buffer requirement for banks from 2.5% to 1% in March. This could help discourage banks from tightening lending in the face of prospects for reduced earnings.

 

Krone depreciation will lead to a temporary rise in inflation

In March, underlying inflation was close to the inflation target of 2%. The sharp fall in energy prices has curbed the rise in consumer price index. The krone depreciation and higher energy prices are expected to push up price inflation ahead.

This year’s wage settlement has been postponed until August because of the pandemic. Profitability has deteriorated in large parts of the business sector. Combined with high unemployment, this points to weak developments in real wages.

 

Policy rate reduced to 0%

The operational target of monetary policy is annual consumer price inflation of close to 2% over time. Inflation targeting shall be forward-looking and flexible, so that it can contribute to high and stable output and employment and to countering the build-up of financial imbalances.

The Norwegian economy has entered a historically deep downturn. Extensive containment measures in Norway, the oil price fall and economic contraction among our trading partners have led to a sharp fall in mainland output and a pronounced rise in unemployment. It is assumed that containment measures are gradually eased, and that economic activity in Norway picks up ahead. Nevertheless, it will likely take time for output and employment to return to the levels prevailing before the pandemic.

Low interest rates cannot prevent the coronavirus crisis from having a substantial impact on the Norwegian economy, but can help dampen the downturn. Low interest rates reduce borrowing costs, making it easier for indebted Norwegian firms and households to weather a demanding period. At the same time, low interest rates may help reduce the risk of a sharp fall in house prices. As the situation normalises, low interest rates will support a faster rebound in activity, which may reduce the risk of persistently low employment.

The uncertainty surrounding the economic outlook is unusually high. Developments depend on the evolution of the pandemic and duration of containment measures abroad and in Norway, but also on how households and businesses respond to the easing of restrictions.

In discussing the balance of risks, the Committee gave particular weight to the risk that the downturn could have a prolonged impact and that unemployment could become entrenched at a high level. The Committee also discussed the risk of a marked rise in inflation while activity remains low. This could occur in the event of a further krone depreciation, higher costs due to the coronavirus outbreak, or shortages of some goods and services. High unemployment and low wage growth are nevertheless expected to dampen inflation in the somewhat longer term.

In the Committee’s assessment, the overall outlook and balance of risks imply a very expansionary monetary policy stance. In March, the policy rate was reduced by 1.25 percentage points to 0.25%. With a rate close to zero, there is a limit to how much further the rate can be lowered. Other countries have experienced that policy rates can continue to have an impact at slightly below zero, but it is uncertain how negative rates could influence the economy and financial markets, particularly in the current situation. The Committee emphasises that it is now of particular importance to ensure well-functioning financial markets.

The Committee decided unanimously to reduce the policy rate by 0.25 percentage point to 0%. In the Committee’s current assessment of the outlook and balance of risks, the policy rate will most likely remain at today’s level for some time ahead. The Committee does not envisage making further policy rate cuts.

Øystein Olsen
Ida Wolden Bache
Jon Nicolaisen
Ingvild Almås
Jeanette Strøm Fjære

6 May 2020