MNI REVIEW: Norges Bank Cuts Policy Rate To Zero 'Floor'

By David Robinson

     LONDON (MNI) - Norges Bank cut its policy rate to zero on Thursday with

Governor Oystein Olsen again making clear that he is unsympathetic to taking the

rate negative, even as the bank forecast a sharp GDP contraction this year.

     The decision by Norges Bank's Executive Board suggests that it may have

completed rate cuts in response to the coronavirus, with the government, with

its robust public finances, able to take up much of the strain.

     -The committee cut the policy rate from 0.25% at its May meeting, having

lowered it from 1.5% to 0.25% in March.

     "In the Committee's current assessment of the outlook and balance of risks,

the policy rate will most likely remain at today's level for some time ahead. We

do not envisage making further policy rate cuts", Olsen said in a statement.

     -Updated economic forecasts in the central bank's Monetary Policy

Assessment's showed mainland GDP falling 5.2% in 2020, and for a partial

recovery in 2021, with 3.0% growth.

     The policy rate was assumed to be flat at zero through 2021, 2022 and 2023.

     -Inflation was shown above the 2.0% target in 2020, 2021 and 2022, coming

in at 2.5% this year and 2.8% next year on the CPI-ATE measure, before falling

to 2.1% in 2021 and 1.7% in 2023.

     -One concern for the Norges Bank has been the exceptional weakness of the

krone, with the currency hitting record lows when the impact of coronavirus

first became clear in March and with oil prices plunging.

     Norges Bank has made extraordinary krone purchases of NOK 3.5 billion. The

currency has stabilised on its trade weighted index at close to 122, having

spiked over 130 in March, with a higher number indicating depreciation.

     -The Norges Bank committee discussed the risk of higher inflation, while

concluding the balance of risks was balanced.

     There was a "risk of a marked rise in inflation while activity remains low.

This could occur in the event of a further krone depreciation, higher costs due

to the coronavirus outbreak, or shortages of some goods and services," the

Monetary Policy Assessment said.

     -While the committee supported very expansionary monetary policy, there was

scepticism about taking rates into negative territory.

     "Other countries have experienced that policy rates can continue to have an

impact at slightly below zero, but it is uncertain how negative rates could

influence the economy and financial markets, particularly in the current

situation," the assessment concluded.

--MNI London Bureau; tel: +44 203-586-2223; email: david.robinson@marketnews.com

[TOPICS: MT$$$$,MX$$$$]