Norwegian Krone Forces GBP/NOK Off Highs after Norges Bank Joins Rate Cut Club

Image © Norges Bank 2018

- GBP/NOK Spot rate: 12.66 ,down -0.87% today

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The Norwegian Krone strengthened Friday, forcing the GBP/NOK rate back from multi-year highs even after the Norges Bank announced a large and unscheduled interest rate cut to support the economy as it grapples with one of the fastest per-capita coronavirus growth rates in the world. 

Norges Bank cut the cash rate 50 basis points to 1% in a surprise move aimed at supporting an economy that's besieged by headwinds on almost all fronts, citing the risk of “a pronounced economic downturn” in the oil-producing economy. The Krone has stabilised in the wake of the cut despite that it’s also knocked the currency off its perch as the highest-yielding unit among the majors, although it does also follow several days of severe losses.

The rate cut came as the finance ministry announced that it would reduce the countercyclical capital buffer for commercial banks from 2.5% of risk-weighted-assets to just 1%, a larger relaxation than that unveiled by the Bank of England this week but lesser move than the one set out by the European Central Bank Thursday. And both measures follow the Norges Bank announcement of “F-loans” on Thursday, as it seeks to force down money market rates paid by commercial banks who borrow from each other.

“There is considerable uncertainty about the duration and impact of the coronavirus outbreak, with a risk of a pronounced economic downturn. The Committee is monitoring developments closely and is prepared to make further rate cuts. A lower policy rate cannot prevent the coronavirus outbreak from having a substantial impact on the Norwegian economy, but it could dampen the downturn and mitigate the risk of more persistent effects on output and employment,” the bank says. 

Above: Pound-to-Krone rate shown at hourly intervals alongside USD/NOK (blue line).

Any rate cut can normally be expected to weigh on a currency although responses to the growing number of rate cuts announced in the last week have been mixed. Both the U.S. and oil-sensitive Canadian Dollars being mauled after their central banks cut deposit rates by 50 basis points. Although neither the Pound nor the commodity-sensitive Australian Dollar suffered when the Bank of England and Reserve Bank of Australia cut their cash rates.  

“Yesterday, the 3M Nibor rose by 21bp due to stress in money markets. The Norwegian government announced a series of strong measures to curb the spread of the coronavirus. These measures will reduce activity in several industries for the coming weeks. Based on the outlook of a major drop in activity growth for 2020 and the actions announced today we find it likely that the policy rate will be cut further, at least by 25bp in June,” says Kyrre Aamdal, a senior economist at DNB Markets.

Norway is being hit hard by the coronavirus crisis that’s so-far helped cut the price of its main export by nearly 50% this far in 2020 and has been spreading at among the fastest per capita growth rates in the world in the country. Norway and the other Nordic countries have more than 90 coronavirus cases per million citizens, according to Pantheon Macroeconomics analysis, which is far higher than even in the European coronavirus epicentre of Italy, which has less than 30 cases per million citizens.

“The sharp fall in oil prices and global interest rate expectations meant Norges bank easing was only a matter of time. Today's 50bp move could be followed by more, but for the time being the sharp fall in NOK over recent days will do some of the central bank's work for it,” says James Smith, a developed markets economist at ING. "Policymakers have explicitly said that rates could be lowered further, and we certainly wouldn’t rule that out, particularly in light of the drastic interest rate moves markets are increasingly looking for from the Fed." 

Above: Pound-to-Krone rate shown at weekly intervals alongside USD/NOK (blue line).

The Norges Bank’s actions came amid a broad rebound in risk assets ahead of the weekend, which has played out as markets digest the Thursday Federal Reserve decision to launch a fourth quantitative easing program in the wake of savage sell-off in stock markets and a vicious spike in the U.S. Dollar. The USD/NOK rate rose more than 5% on Thursday, with similarly large gains for the GBP/NOK rate despite heavy losses for Sterling elsewhere. 

“All the data have to be viewed with skepticism, because testing rates vary massively across countries, and the countries which perform more tests have more cases per capita. The official data clearly understate the number of cases. A number of countries appear not to have provided data yet for yesterday, so we can't say for sure what happened to the number of confirmed cases in Europe, which currently has the fastest-growing outbreak,” says Ian Shepherdson, chief economist at Pantheon Macroeconomics.

Central banks and governments are increasingly springing into action, although to varying degrees, in a bid to minimize economic damage from a coronavirus crisis that reached Canada’s highest office on Thursday. 

Canadian Prime Minister Justin Trudeau was self-isolating on Friday after his wife tested positive for the coronavirus that saw 60 million italians placed under a draconian lockdown this week and which threatens to bring similar measures to parts of many other major economies.

"Today’s announcement by the Riksbank that it will provide liquidity to non-financial companies via the banking sector is likely to be the first shot in a package of measures. The bank has decided to lend up to SEK 500 billion (about 10% of GDP) to avert a credit crunch and to prevent otherwise healthy firms from being knocked over. (In contrast, the amount of loans that the ECB has extended through its TLTROs is currently worth about 5% of euro-zone GDP, so the Swedish response is pretty chunky.)," says David Oxley, a senior Europe economist at Capital Economics.