Norges Bank, Norway’s central bank, slashed its main interest rate to a new record low of 0.5% on Thursday. The bank was expected to cut rates, and hinted at another rate cut in autumn to stymie an economic downturn caused by lower oil prices.
The central bank stated that rates may be reduced to zero to help stimulate the economy. Negative rates are also being considered, but only if the economy suffers more shocks.
The oil slump has caused Norway’s gas and oil industry to slow. The industry accounts for roughly one-fifth of the country’s economic output. There is a concern that the industry’s downturn will spread and effect the rest of the economy.
Oil prices have rebounded considerably since falling to a low earlier in the year, but prices are still down by 65% since mid-2014. Energy companies in Norway are being forced to lay off thousands of workers just to stay afloat.
Economists were expecting the bank to cut the deposit rate from its previous rate of 0.75%.
Governor Oeystein Olsen stated, “The current outlook for the Norwegian economy suggests that the key policy rate may be reduced further in the course of the year.” At a news conference, he noted that another rate cut may come in autumn.
Sweden and Denmark, Norway’s neighboring countries, have slashed interest rates into negative territory. Norges Bank noted that if the Norwegian economy is “exposed to new major shocks,” the Executive Board will not exclude the idea of negative rates.
Olsen declined to comment on what type of shocks to the economy may result in negative interest rates.
Norges Bank is being cautious, but leaving the door open to zero rates and possibly even moving into negative territory if necessary. It’s not surprising that the central bank is considering negative rates, as central banks in other countries are taking this route.
The Norwegian crown advanced 1% against the dollar and the euro on Thursday before reversing gains.
The central bank has been attempting to restore balance in an economy that has slowed due to falling oil prices. Norges Bank has reduced borrowing costs from 1.5% in December of 2014.