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Norway's Central Bank Governor Oeystein Olsen speaks in his office on Feb. 13, 2020.

NTB SCANPIX/Reuters

Norway’s central bank slashed interest rates on Friday and lined up emergency loans for banks, as it warned of a sharp economic downturn triggered by the coronavirus outbreak.

Norges Bank cut its key policy rate to 1.0 per cent from 1.5 per cent and signalled it may cut again. The announcement was unexpected and the reduction its biggest since 2011.

To safeguard the flow of credit to companies and individuals amid signs of a liquidity squeeze, it also announced the first of a series of loans to the banking industry and eased capital reserve requirements.

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“There is considerable uncertainty about the duration and impact of the coronavirus outbreak, with a risk of a pronounced economic downturn,” the bank’s monetary policy committee said in a statement. “The committee is monitoring developments closely and is prepared to make further rate cuts.”

The government on Thursday invoked emergency powers to close a wide range of public and private institutions in a bid to combat the virus’s spread that it described as Norway’s “strongest-ever peacetime measures”.

As a result of the local and global economic disruptions, Norway’s GDP growth is expected to slow to just 0.4 per cent in 2020, Norges Bank said. In December it had forecast an expansion of 1.9 per cent.

“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,” it added.

The central bank had been due to announce its next rate decision on March 19, but waiting for another six days was not a real option, said Handelsbanken Chief Economist Kari Due-Andresen, who earlier this week had called on the bank to act.

“The central bank is doing what it can,” she said, forecasting that it would cut base rates further.

Projections in the central bank’s monetary policy report suggested a cut of 25 basis points was pencilled in for May or June, with a slight possibility of further easing after that, brokers Nordea Markets said, also forecasting further easing.

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To facilitate lending, Norges Bank also cut to 1.0 per cent from 2.5 per cent of risk-weighted capital the countercyclical buffer that obliges banks to accumulate extra reserves during boom periods.

Industry group Finance Norway estimated that the move, carried out with the endorsement of the finance ministry, will increase Norway-based banks’ lending capacity by between 500 billion and 600 billion Norwegian crowns ($50 billion-$60 billion).

“Cutting the countercyclical buffer is a powerful and effective tool that meets companies’ needs for increased funding,” its Chief Executive, Idar Kreutzer, said.

Norway’s crown currency strengthened slightly, trading at 11.19 against the euro at 1029 GMT from 11.21 just ahead of the 0730 GMT announcement.

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