Norway's Overlooked Fact: Rate Seen Going Deeper Below Zeroby
Poll shows Norges Bank will cut main rate to 0.5% this week
Zero rate seen by some at end of 2016 as oil price stays low
Here’s a little known fact: Norwegian banks may soon need to contend with interest rates even deeper below zero.
While the key policy rate is at 0.75 percent, the rate on excess reserves fell below zero in September and is now at minus 0.25 percent. With 18 out of 20 economists surveyed by Bloomberg predicting another cut in the main rate to 0.5 percent, that reserve rate is expected to go lower too on Thursday.
The central bank needs to start thinking about what happens if the main rate also eventually goes below zero, according to Magne Oestnor, an analyst at DNB ASA. Negative rates could have a bigger impact on profitability for lenders in Norway than in other countries and DNB, Norway’s largest lender, has already started making contingency plans on how to deal with such a scenario and maintain profitability.
If the key policy rate also goes negative it “will hit banks more severely in Norway than what’s the case in Sweden, Denmark and Switzerland,” said Oestnor. That’s because in those countries only part of the reserves are affected while in Norway, “all reserves will be hit,” he said.
The plunge in crude prices is squeezing Norway’s economy and growth stalled in the second half of last year. The central bank cut rates three times in less than 12 months and in December signaled as many as two more reductions in 2016. While underlying inflation in February accelerated to 3.4 percent, well above the 2.5 percent target, Nordea Bank and Svenska Handelsbanken expect zero rates by the end of the year.
“The outlook for the Norwegian economy has worsened over the last couple of months,” said Joachim Bernhardsen, an analyst at Nordea. A combination of persistently low oil prices and low rates abroad means "Norges Bank will have to lower rates to zero.”
With central banks across Europe either battling the threat of deflation or trying to defend their currency pegs, negative rates are also in place in Norway’s biggest trading partner, the euro area. European Central Bank President Mario Draghi on Thursday cut the overnight rate to minus 0.4 percent and its benchmark rate to zero.
One key to shielding the economy is a weaker krone, central bank Governor Oeystein Olsen said in a speech last month.
The krone has slid 15 percent on a trade-weighted basis as Brent crude has slid 65 percent since its June 2014.
The need to maintain the krone weak will make it “imperative for Norges Bank to fuel even lower policy rate expectations,” chief SEB AB strategist Erica Blomgren wrote in a note.