Norges Bank surprises market as rate hike remains years away

[OSLO] Norway's central bank ruled out an increase in interest rates for the coming years, citing a highly uncertain economic environment due to the ongoing pandemic.

The comments triggered a slump in the krone after some investors and analysts had expected a more hawkish signal.

"The sharp economic downturn and considerable uncertainty surrounding the outlook suggest keeping the policy rate on hold until there are clear signs that economic conditions are normalizing," Norges Bank Governor Oystein Olsen said in the statement on Thursday. The bank kept its main rate at zero, as expected.

"The policy rate forecast is little changed since June 2020 Monetary Policy Report and implies a rate at the current level over the next couple of years, followed by a gradual rise as activity approaches a more normal level," the bank said.

Many economists had speculated that Norges Bank might bring forward its tightening plans, possibly even into next year. Norway faces a milder recession than most other countries struggling with the Covid crisis, thanks in part to an effective lockdown strategy and about US$13 billion in government support packages. What's more, its US$1.1 trillion sovereign wealth fund has bankrolled record stimulus, without Norway ever having to tap bond markets.

Norway's enormous fiscal buffers mean there's less pressure on monetary policy to prop up the economy. It's the only country in Scandinavia never to have tried negative rates, and Mr Olsen has repeatedly made clear he's keen to avoid the policy. The bank is still signaling the possibility of a hike in late 2022, which is earlier than other central banks within the G10 currency sphere.

GET BT IN YOUR INBOX DAILY

Start and end each day with the latest news stories and analyses delivered straight to your inbox.

Sign UpVIEW ALL

"Low interest rates contribute to speeding up the return to more normal output and employment levels," Norges Bank said on Thursday. "This reduces the risk of unemployment becoming entrenched at a high level. On the other hand, a long period of low interest rates could increase the risk of a build-up of financial imbalances." Though Mr Olsen never resorted to unconventional monetary policy tools, he was forced to respond to a dramatic selloff in the krone earlier this year by threatening currency interventions for the first time in more than two decades. The steps helped stabilise the currency, though it remains weak.

The krone of Norway, which is western Europe's biggest oil exporter, is closely correlated to the price of crude, which is down more than 30 per cent this year. The krone has lost about 13 per cent against the euro so far in 2020 and roughly 8 per cent against the dollar, making it the worst performing currency in the G10 sphere.

BLOOMBERG