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 an update to its monetary policy report, NB lowered the projected path of the policy rate to 0.75 percent in the second quarter of 2020, reflecting a dampening effect on inflation from anti-virus contagion measures, especially through prices for holidays, hotels and air travel.
Further out, the weakening of the Norwegian krone will push up inflation while lower wage growth and capacity utilization will pull in the opposite direction.
The policy rate is seen averaging 1.0 percent this year, then 0.7 percent in 2021 before rising slightly to 0.8 percent in 2022 and 0.9 percent in 2023.
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.
NB slashed its 2020 economic growth forecast for the mainland to 0.4 percent from December's forecast of 1.9 percent and cut the 2021 forecast to 1.3 percent from 1.4 percent.
In 2019 Norway's economy grew 2.4 percent. For 2022 NB forecast growth of 2.0 percent and then 1.5 percent in 2023.
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.
Norges Bank’s mission is to promote economic stability. We do so by ensuring robust and efficient payment systems and financial markets and by adjusting the interest rate level to the economic situation.
Policy rate reduced by 0.50 percentage point to 1 percent
In the near term, activity in the Norwegian economy will decline considerably owing to the coronavirus outbreak. Many firms are feeling the negative effects. Layoff notices have already been issued, and unemployment is expected to rise. Economic prospects have also weakened on the back of the sharp fall in oil prices.
At an extraordinary meeting on 12 March, Norges Bank’s Monetary Policy and Financial Stability Committee voted unanimously to reduce the policy rate by 0.50 percentage point to 1.00 percent. There is considerable uncertainty about the duration and impact of the coronavirus outbreak, with a risk of a pronounced economic downturn. The Committee is monitoring developments closely and is prepared to make further rate cuts.
A lower policy rate cannot prevent the coronavirus outbreak from having a substantial impact on the Norwegian economy, but it could dampen the downturn and mitigate the risk of more persistent effects on output and employment.
Extraordinary F-loans to banks
In recent weeks there has been substantial volatility in financial markets. Risk premiums in the Norwegian money market have risen sharply. In order to ensure that the policy rate passes through to money market rates, Norges Bank offers extraordinary three-month F-loans for as long as deemed necessary. The F-loans will be fully allotted at an interest rate equal to the prevailing policy rate.
Countercyclical capital buffer should be reduced to 1 percent
Norges Bank has advised the Ministry of Finance to reduce the countercyclical capital buffer for banks from 2.5 to 1 percent, with immediate effect. The Ministry of Finance has today decided to follow Norges Bank’s advice.
Norwegian banks are solid. They have sufficient capital to absorb losses in the event of a severe downturn. However, tighter lending standards could amplify an economic downturn. A reduction in the countercyclical capital buffer can counteract a tightening of banks’ lending standards.
See advice on the countercyclical capital buffer 2020 Q1."
"Advice on the countercyclical capital buffer 2020 Q1
Norges Bank’s Monetary Policy and Financial Stability Committee has decided to advise the Ministry of Finance to reduce the buffer rate to 1.0 percent.
Norges Bank shall advice the Ministry of Finance on the level of the countercyclical capital buffer for banks. The countercyclical capital buffer rate is currently 2.5 percent.
In recent weeks, there has been considerable financial market volatility. The outbreak of coronavirus (Covid-19) and the measures to limit contagion will have a significant negative impact on growth in the Norwegian economy. There is substantial uncertainty about the duration and the consequences of the outbreak, with a risk of a pronounced economic downturn.
Norwegian banks are solid. They have sufficient capital to absorb losses in the event of a severe downturn. A tightening of lending standards may, however, amplify the downturn in the economy.
Against this background, the Committee has decided to advise the Ministry of Finance to reduce the buffer to 1.0 percent with immediate effect. The decision was unanimous.
Norwegian banks are profitable. When banks’ general meetings decide on dividend payments, they should in the period ahead take account of the extraordinary situation now facing our country.
The Committee does not expect to advise the Ministry to increase the buffer rate again until 2021 Q1 at the earliest. Normally, implementation of an increase in the countercyclical capital buffer will not be effective until 2022 Q1 at the earliest. In preparing its advice on the countercyclical capital buffer, Norges Bank has exchanged information and assessments with Finanstilsynet (Financial Supervisory Authority of Norway)."
"Extraordinary F-loans to banks
Owing to the market situation over the past few days, Norges Bank will offer extraordinary three-month NOK F-loans as from 13 March 2020. Norges Bank will offer extraordinary three-month F-loans for as long as is deemed appropriate. The loans are being offered to ensure that the policy rate passes through to money market rates.
The following conditions apply:
- The F-loan falls due after three months.
- The interest rate on the F-loan is the policy rate prevailing at any time.
- The F-loan will be fully allotted. All banks will receive the desired volume at the announced interest rate. The same collateral requirements will apply as for ordinary F-loans.
- Norges Bank will continue to aim to keep central bank reserves (banks' unrestricted bank deposits at the central bank) overnight at around NOK 35 billion (with a target range of plus/minus NOK 5 billion).
- Surplus liquidity will be withdrawn from the banking system using daily F-deposits with one-day maturity. Banks can then draw on the liquidity from the extraordinary F-loans on a daily basis.
- New three-month F-auctions will be held at least every week for four weeks ahead, see auction calendar. The calendar will be updated on a continuous basis. Norges Bank will offer extraordinary three-month F-loans for as long as is deemed appropriate."
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