(Bloomberg) --
Norway’s central bank signaled it will need to keep interest rates at crisis lows for several years if it’s to revive the economy.
The bank left its benchmark deposit rate at a record low of zero, as expected, after delivering three cuts earlier in the year to steer the richest Nordic economy through the Covid-19 crisis.
“The Committee’s current assessment of the outlook and balance of risks suggests that the policy rate will most likely remain at today’s level for some time ahead, Norges Bank Governor Oystein Olsen said in a statement on Thursday.
“The policy rate forecast implies a rate at the current level over the next couple of years, followed by a gradual rise as economic conditions normalize,” the bank said.
Norges Bank has gone to historic lengths to support the economy this year, wiping 1.5 percentage points off the policy rate, threatening currency interventions and providing banks with cheap credit. As western Europe’s biggest oil exporter, Norway has faced a double crisis, with an unprecedented slump in crude prices adding to the economic devastation caused by Covid-19.
But recent data suggest the worst might be over. The government of Prime Minister Erna Solberg was quick to impose a strict lockdown, bringing Covid-19 contagion rates under control and allowing Norway to reopen much of the economy sooner than others.
Norges Bank now sees Norway’s mainland economy shrinking 3.5% this year. It had previously expected a contraction of 5.2%. Next year, the economy is estimated grow 3.7%, it said.
In its Monetary Policy Report, Norges Bank indicated there’s a slight chance it could start raising rates as soon as 2022. In May, the bank had signaled zero rates until the end of 2023.
“Activity has picked up faster than expected. Unemployment has fallen more than anticipated and oil prices have risen. Activity is nevertheless substantially lower than at the start of the year, and there is considerable uncertainty surrounding the path to recovery,” the bank said.
The krone gained against the euro after the announcement, and traded about 0.5% higher as of 10:08 a.m. in Oslo.
What’s more, Norway’s status as the owner of the world’s biggest sovereign wealth fund gives the government considerably more scope to provide fiscal support than many other countries. Solberg’s administration has already pledged record measures to support the labor market and businesses. The government plans to withdraw a record 368 billion kroner ($39 billion) from its wealth fund to cover the extra spending.
Read: Norway Adds $2.8 Billion in Spending to Exit Virus Slump
(Adds GDP forecasts, krone)
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