Prior to the decisions made in March and in the weeks that followed, the Monetary Policy and Financial Stability Committee met frequently, often at short notice. On 12 March, we decided to cut the policy rate by 0.50 percentage point. The countercyclical capital buffer requirement was reduced the day after, helping banks to absorb losses and still have the capacity to provide credit. A week later, we reduced the rate further to 0.25 percent. And at the May monetary policy meeting, we took a step further and reduced the policy rate to zero. The Committee also stated that in its current assessment of the outlook for the economy and the balance of risks, the policy rate would most likely remain at today’s level for some time ahead. With a policy rate close to zero, there is a limit to how much further it can be lowered. Other 2/4  BIS central bankers' speeches  countries have experienced that policy rates can continue to have an impact at slightly below zero, but it is uncertain how negative rates will influence the economy and financial markets, particularly in the current situation. The Committee stated at the monetary policy meeting in May that it is now of particular importance to ensure well-functioning financial markets. The Committee does not envisage making further policy rate cuts. Low interest rates cannot prevent a severe downturn, but can help dampen the decline in activity.
None of us at that time could have foreseen that a virus would change the picture completely and lead the Norwegian and the global economy into a deep decline. Chart: A historically deep decline The economic outlook has changed dramatically in a short period of time. Activity in the Norwegian economy has fallen abruptly owing to the coronavirus pandemic. The virus outbreak and the extensive measures taken to contain it have led to production halts and lower activity across a range of businesses. Unemployment has risen to very high levels. Mainland GDP is projected to fall by around 5 percent in 2020. We have not seen a contraction like this since the war years. Chart: An abrupt and deep decline in the global economy The countries around us have also been severely affected. Measures taken to contain the spread of the virus, combined with changes in behaviour and uncertainty about developments ahead, have resulted in substantial declines in output across economies. In early March, we expected moderate economic growth among trading partners. Now a deep decline appears likely this year followed by a gradual rebound. The subsequent path of developments is, however, highly uncertain. The authorities in many countries have implemented powerful fiscal policy measures to alleviate the situation. Central banks have cut policy rates and taken extensive measures to stabilise financial markets. The sharp global downturn amplifies the challenges for a small open economy like Norway.