UPDATE 2-Norway central bank cuts rates to zero to soften coronavirus impact

2020-05-07

* Norges Bank cuts to record low

* Third rate cut in less than two months

* Expects rates to stay at zero for several years

* Crown currency weakens against euro (Adds background)

By Terje Solsvik and Victoria Klesty

OSLO, May 7 (Reuters) – Norway’s central bank has cut its key interest rate to a record-low zero percent from 0.25%, it said on Thursday in a surprise move, seeking to cushion an economy reeling from the COVID-19 pandemic.

Most economists polled by Reuters had predicted rates would stay on hold.

It was Norges Bank’s third rate cut in less than two months, slashing the cost of borrowing from 1.5%, and rates are likely to stay at zero for the next several years, its forecasts showed.

“We do not envisage making further policy rate cuts,” Governor Oeystein Olsen said in a statement.

Norges Bank now predicts the mainland economy, which excludes oil and gas output, will contract by 5.2% in 2020, down from a March 13 forecast of 0.4% growth. It expects growth of 3.0% in 2021, up from 1.3% seen earlier.

The crown currency, which has weakened from the twin impacts of the novel coronavirus and a crash in oil prices, fell to trade against the euro at 11.14 at 0811 GMT, down from 11.07 just before the 0800 GMT rate announcement.

“This decision comes unexpected, and is not in line with consensus,” Nordea Markets said in a note to clients.

RECORD LOW

Until March, Norway’s key policy rate had never been lower than 0.5%, the level which it stood at from 2016 to 2018.

“So it was one more cut, we are down to a nil key policy rate! At the same time Norges Bank is clear that the effective lower limit for the rate is reached,” said Kjersti Haugland, chief economist at DNB, Norway’s largest bank.

“The probability of a negative rate in Norway is thus significantly reduced,” she said.

The government has invoked emergency powers to restrict travel and shut many public and private institutions, although steps are now taken to gradually open up society.

April unemployment surged to more than 15%, the highest level on record, amid mass layoffs by corporations, data from Norway’s Labour and Welfare Agency (NAV) show.

The government has offered business loans, tax deferments and spending worth 360 billion crowns ($35 billion), while the central bank pumped money into the financial industry and said it may intervene in the currency market.

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