NEWS

Norway’s central bank can continue to cut interest rates and the government should use short-term fiscal spending to lift the economy as the boom of the last two decades grinds to a halt, the country’s central bank chief said on Thursday.

He also said more than $9 billion would be taken from Norway’s sovereign wealth fund this year, the first net withdrawal from the rainy day account.

Economic growth in Norway, Western Europe’s top oil and gas producer, hit a six-year low in 2015 while unemployment rose to a 10-year high as the price of crude tumbled, Governor Oeystein Olsen said in his annual policy address to business leaders, politicians and academics.

He painted a bleak picture, arguing that a shift towards non-oil industries was essential while warning that unemployment would remain at elevated levels.

“We have always known that the long oil-driven expansion would come to an end …. We have now reached that juncture,” Olsen said. “The Norwegian economy has enjoyed an exceptionally long summer. Winter is coming,” he added.

With oil prices down by 70 percent since mid-2014, the government is set to make its first-ever withdrawal of cash this year from the country’s $810 billion sovereign wealth fund, Olsen said.

“At today’s oil price, it may be necessary to use about 80 billion Norwegian crowns ($9.30 billion)”, he added.

Unlike the 2008-2009 financial crisis, when Norway rebounded sharply from a short-lived recession, the structural reforms would be a time-consuming affair, the central bank said.

“When unemployment rises, as is the case today, it may be appropriate to use the fiscal space available. We must avoid a self-reinforcing decline in output and employment and hence a decline that is more pronounced than necessary,” Olsen added.

Norges Bank has halved its cost of borrowing to a record low 0.75 percent in the last 14 months and in December it said the board would probably reduce it again in the first half of 2016.

By cutting rates, the central bank can contribute to weakening the crown currency and make Norwegian firms more competitive, while households get a higher disposable income thanks to lower mortgage interest payments, the governor said.

“There is still monetary policy room for manoeuvre,” he added.

Recent turmoil in global financial markets could add to Norway’s woes, Olsen said.

“Since the start of the year we’ve seen signs that global growth is easing further. If this trend is reinforced, it will be the biggest worry as the timing is highly unfortunate for Norway,” Olsen told Reuters.

But while the central banks of neighbouring Denmark and Sweden have both cut the cost of borrowing to negative levels, he cautioned that such a move could have limited effects.

“The effect of further policy rate cuts may weaken when rates fall below zero,” Olsen said, arguing that commercial banks would be reluctant to start charging for taking deposits and that customers may walk away if they did.

“The board has not considered this or any other monetary policy tools,” he told Reuters, adding that measures such as quantitative easing were not on the agenda.