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.
Source: Norges Bank / Norway Today