Norway’s central bank cut interest rates to a record low of zero but said it was unlikely to go negative as the rich Scandinavian country faces up to the twin shocks of coronavirus and an oil price collapse.
Norges Bank said on Thursday that the 0.25 percentage point cut would not prevent Covid-19 from having “a substantial impact on the Norwegian economy but can help dampen the downturn”, including by stopping high unemployment becoming entrenched.
“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. We do not envisage making further policy rate cuts,” said governor Oystein Olsen.
Norway has cut its interest rate by 1.5 percentage points in the past two months as the Nordic country faces up to its biggest economic slowdown since at least the second world war.
Home to the world’s largest sovereign wealth fund, with about $1tn in assets, Norway has more room than most to stimulate its economy but the pressure on its oil industry — it is the largest crude producer in western Europe — means that many economists expect it to face a more straitened future after the twin crises.
Norges Bank forecast that mainland growth, which strips out the oil industry, would decline by 5.2 per cent this year while unemployment is expected to rise to 6.3 per cent, well below the current 14.6 per cent rate.
Mr Olsen has long expressed scepticism about negative rates despite their use in neighbouring Sweden and Denmark as well as in the eurozone.
“With a policy rate close to zero, there is a limit to how much further it 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,” Norges Bank said on Thursday in its monetary policy report.
It added, in a further hint of its scepticism of negative rates: “It is now of particular importance to ensure well-functioning financial markets.”
The central bank forecast that interest rates would remain at zero until at least 2023. In its discussions of the merits of such low rates, the central bank argued that reduced borrowing costs for companies and households as well as support for a faster rebound outweighed fears of a “marked rise in inflation”.
The Norwegian krone has hit record lows in recent months, causing Norges Bank to threaten to intervene in the currency markets for the first time in decades amid worries that a further decline could lead to inflation via costlier imports. The krone fell immediately after news of the rate cut, declining by about 0.7 per cent against the euro.
Source: Economy - ft.com
