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Norway Monetary Policy August 2020

Norway: Norges Bank holds rates at zero in August

At its monetary policy meeting on 20 August, the Executive Board of Norges Bank unanimously decided to maintain the sight deposit rate at 0.00%, as it had done at the previous meeting in June. The decision follows 150 basis points of easing this year, culminating in May’s move to drop rates to zero.

The verdict echoed the decision made in June, with heightened uncertainty due to the ongoing pandemic driving the Bank’s wait-and-see approach. This came despite a cautiously optimistic tone in its communiqué, with the Board noting that recent data points to an uptick in activity: GDP grew 2.4% and 3.7% in month-on-month terms in May and June, respectively. However, activity remains “lower than prior to the pandemic” and as such, the Bank deemed it necessary to maintain interest rates at zero.

Looking forward, the Bank indicated it will keep rates at the current level for the foreseeable future, following the “Committee’s assessment of the outlook and balance of risks”. However, the Committee noted that “recently, the spread of Covid-19 has increased, and some containment measures have been reintroduced” presenting downside risks to the outlook. Norges Bank provided no new forecasts for GDP, but commented that “economic activity overall appears to have picked up broadly as projected in the June Report”, in which it forecast mainland GDP to shrink 3.5% in 2020 before rebounding 3.7% in 2021.

Regarding the outlook, James Smith, an economist at ING, commented:

“Norges Bank kept its main policy rate at zero at its August meeting. And while its short statement emphasised there are plenty of unknowns in the outlook, the reality is that there’s not a great deal more policymakers can add in terms of support. In a speech last year, Governor Øystein Olsen noted that neither negative rates nor quantitative easing were really viable options for Norway. On the former, he indicated that the costs of moving rates below zero probably outweigh the benefits. For quantitative easing, there are logistical constraints, including that the size of the Norwegian government bond market is pretty small and illiquid. In other words, don’t expect rates to move in either direction any time soon.”

This is a viewpoint shared by the FocusEconomics Consensus Forecast panel, which sees rates staying at zero for the rest of 2020.

The next monetary policy meeting is scheduled for 24 September.

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