Norges Bank Slashes Key Rate by Half Point to Fight Crisis

(Bloomberg) -- Norway’s central bank delivered an emergency half-percentage point cut to its main interest rate and signaled more will come as policy makers pump stimulus into the economy a week ahead of a scheduled meeting.

“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,” the bank said on Friday.

The krone, which had suffered a dramatic sell-off earlier in the week, rebounded after the central bank announced its support measures, gaining as much as 1.6% against the euro. But the exchange rate remains historically weak.

Policy makers in Norway are the latest to join a global wave of stimulus efforts. The Federal Reserve slashed its main rate by a half point on March 3, and was soon followed by others including the Bank of England. The European Central Bank opted not to cut its main rate, choosing instead to add liquidity, leaving markets somewhat underwhelmed.

Cutting the benchmark rate to 1% from 1.5%, Norges Bank said it “is monitoring developments closely and is prepared to make further rate cuts.” Norges Bank signaled a further reduction of 25 basis points during the third quarter in a new rate outlook that accompanied Friday’s decision.

In measures specifically targeting banks, Norway will also cut the so-called countercyclical capital buffer to 1% from 2.5%, to encourage the industry to keep lending to businesses.

Policy makers in Norway are racing to protect their oil and trade-reliant economy from the ravages of the coronavirus pandemic and a crash in crude prices. Some economists warn that a recession is coming, and investors have dumped the Norwegian krone as the panic spreads.

The number of coronavirus cases in Norway has soared to above 600, prompting school shutdowns and the closure of borders to travelers from the hardest hit countries.

“In the near term, activity in the Norwegian economy will decline considerably owing to the coronavirus outbreak,” Norges Bank said. “Unemployment is expected to rise. Economic prospects have also weakened on the back of the sharp fall in oil prices.”

The Norwegian government is set to present a stimulus package later on Friday, with measures expected to range from new layoff-rules to efforts to help the struggling airline industry.

Some of Norway’s biggest companies have been devastated by the latest developments, given the nation’s exposure to oil and trade. Norwegian Air Shuttle ASA on Thursday extended its plunge so far this year to 80% after the U.S. imposed a partial travel ban targeting Europe. DNB ASA, Norway’s biggest bank and a major provider of loans to the offshore industry, has plunged by a third this year. Equinor ASA, the country’s biggest oil and gas producer, also slumped with crude prices.

As recently as the second half of last year, Norway’s central bank was raising rates to help steer the economy’s growth. The nation’s vast oil wealth, which has helped build a $1 trillion wealth fund, has generally helped Norway weather most storms, but policy makers say it remains unclear what effect the current crisis will have.