Our Banks Can Handle Zero Rates, Norway Saysby
Nordea Bank sees three rate cuts this year to zero percent
Policy makers may be hesitant to go negative, Nordea says
With talk swirling about the Norwegian interest rate heading to zero, the nation’s finance minister is confident its banks can withstand the added pressure to their balance sheets.
“The Norwegian banking system is very robust and has been able to adjust quickly to the new demands in regulatory framework,” Siv Jensen said Thursday in an interview after a speech in Oslo. “They are robust enough to face changing economic times in Norway.”
That change may even mean negative interest rates, which have spread across the continent and are pressuring bank earnings. For banks in western Europe’s biggest oil producer that would add to difficulties already faced from the worst crude plunge in a generation.
Norway’s banks already face tougher capital requirements as the regulator forces the industry to gird itself against stressed economic conditions. DNB ASA, the nation’s biggest, saw its profit rise in the fourth quarter, while loan impairments increased. The regulator this year said there’s reason to fear that the proportion of bad loans might be higher than levels reported by the financial industry.
The central bank’s main rate is now at a record low of 0.75 percent after three cuts since 2014 and policy makers in December signaled as many as two more reductions this year. But with Brent stuck in the $30s and the cracks in the economy becoming more pronounced, Nordea Bank AB expects policy makers will need to go all the way down to zero by year end.
“That’s probably needed to prevent the krone from strengthening too much,” said Erik Bruce, senior economist at Nordea. Negative rates in Sweden, Denmark and in the euro zone are dragging Norway along, he said.
Norway is already reaching into its $830 billion sovereign wealth fund for the first time to plug widening budget gaps as it copes with rising recessionary risks. The government in January withdrew 6.7 billion kroner ($781 million) from the fund, according to the Norwegian Government Agency for Financial Management. That figure corresponds to a forecast from Norges Bank Governor Oeystein Olsen last month that the Finance Ministry may need to withdraw 80 billion kroner over the course of the year.
Norwegian daily Dagens Naeringsliv earlier reported on the data showing the government’s withdrawal.
While an easing this month is basically a “done deal,” Olsen probably won’t be ready to discuss negative rates, Bruce said. “Going negative is something central banks do to weaken their exchange rate -- the impact on domestic demand is very little,” which means it would be “better to surprise,” he said.
Policy makers will be hesitant to go below zero as the impact on Norwegian banks are uncertain, he said. “Norwegian banks have been thinking about the possibility because they’re already there in Sweden and Denmark.”