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Thursday, July 18, 2024

Interest rates cut, shares rebounded

After another terrible day for the Oslo Stock Exchange on Thursday, its main index bounced back Friday morning, up more than 2 percent as trading opened. Investors clearly responded to a Norwegian central bank board decision to cut interest rates by a half-point.

Norway’s major business daily, Dagens Næringsliv (DN), cleared its front page to illustrate just what a dark day it was for the country’s economy on Thursday. On Friday, things were looking up. PHOTO:

The decision was made at an extraordinary meeting of the Monetary Policy and Financial Stability Committee on Thursday, when Norway officially went into crisis mode because of the Corona virus and economic turbulence further sparked by the collapse of oil prices. Oil is Norway’s biggest and most important export product.

The Norwegian government also responded Thursday with what Prime Minister Erna Solberg called the “strictest and most invasive” measures imposed on Norwegians’ daily lives since World War II. The country went into at least partial shut-down Thursday evening, in an effort to halt the spread of the virus.

That’s clearly having enormous economic consequences, which were also due to be addressed with new government relief and even bail-out measures later on Friday, “to ward off unnecessary bankruptcies,” Solberg said.

The central bank (Norges Bank) acted accordingly, and had the financial muscle and means to do so. While interest rates in many countries, including the US, are already so low that their central banks lack latitude to offer rate relief, earlier decisions in Norway to gradually raise rates because of a strong economy came in handy. Committee members could unanimously vote to cut its key policy rate of 1.5 percent by half-a-point, to 1 percent.

Accelerated an interest rate cut
The goal, according to the central bank, is both “price stabiity and financial stability,” along with generating “added value through investment management” of the country’s huge sovereign wealth fund known as the Oil Fund. It also provides Norway with unique support in times of trouble even though its money is set aside for future generations.

Norges Bank’s executive committee already had a meeting scheduled for next week, when an interest rate cut had seemed likely. They accelerated their ability to act, contending that “activity in the Norwegian economy will decline considerably” in the near term, because of the Corona virus outbreak. “Many firms are feeling the negative effects,” the bank wrote in a press release Friday morning. “Layoff notices have already been issued and unemployment is expected to rise. Economic prospects have also weakened on the back of the sharp fall in oil prices.”

The central bank’s “mission,” it claimed, is to promote economic stability “by ensuring robust and efficient payment systems and financial markets, and by adjusting the interest rate level to the economic situation.” The rate cut, it was argued, can provide more liquidity, “dampen the downturn and mitigate the risk of more persistent effects on output and employment.”

Extraordinary loans available to banks, too
The central bank is also offering extraordinary short-term “F-loans” to banks at the new policy rate, to further boost liquidity. It further advised the finance ministry to reduce the banks’ “counter-cyclical capital buffer” from 2.5 percent to 1 percent immediately, which the ministry did. The buffer has been increased in recent years to ensure strong capital requirements, but the central bank thinks it’s reasonable to ease such demands, at least for now.

“Norwegian banks are solid,” the bank wrote, and “have sufficient capital to absorb losses in the event of a severe downturn.” The steps now taken by the central bank are aimed at offsetting any tightening of commercial banks’ lending standards.

At the Oslo Stock Exchange, meanwhile, the strong opening on Friday settled down after an hour of trading, but state oil company Equinor and Norway’s biggest bank, DNB, were among the most active shares still posting gains. Salmon producer Mowi was also up 2.77 percent, to NOK 174.55 per share, after heavy losses on Thursday.

Portions of the Oslo Stock Exchange’s historic building itself, however, had to be closed on Friday after an employee tested positive to the Corona virus. The department where the employee has been working was temporarily closed “for extra cleaning and disinfection.”

For more details of the central bank’s extraordinary measures, click here (external link to Norges Bank’s press release with more links to its Monetary Policy Report and information on both the F-loans and capital buffer.) Berglund



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