Deposits up to a specific quota are remunerated at the key policy rate, which is Norges Bank’s sight deposit rate. Deposits that exceed the quota are remunerated at a rate below the key policy rate, referred to as the reserve rate. 1 Banks that borrow overnight from Norges Bank pay the overnight lending (D-loan) rate. As shown in the chart, the reserve rate and the overnight lending rate are set respectively at 1 percentage point below and 1 percentage point above the key policy rate. 2 Interbank transactions take place throughout the day. The transactions are settled via the banks’ accounts with the central bank. Banks with deposits above the quota at the end of the day normally lend reserves overnight to banks with a negative balance in Norges Bank or to banks that have deposits below the quota. Chart: Norges Bank interest rates and market rate The interest rate on these transactions, called the overnight interbank rate (NOWA in Norway), is normally very close to the key policy rate. The interest rate corridor around the key policy rate is intended to promote reserve trading between banks and not between banks and the central bank. This contributes to an active interbank market and an efficient money market. In order to keep the overnight interbank rate close to the key policy rate, Norges Bank aims to keep banks’ total reserves below the sum of the quotas that can be remunerated at the key policy rate.
However, the experience of the subsequent waves of the pandemic has proven that restrictions are impacting demand increasingly less, whereas supply contracts when enterprises are forced to suspend operations. We consider that restrictions rather have a proinflationary influence now. The industries that directly depend on restrictions, primarily services, will be affected most considerably. The Government has introduced support measures to aid the most vulnerable industries, first of all small and medium-sized enterprises and their employees. The Bank of Russia, on its part, has allocated a limit of 60 billion rubles within a special 4% refinancing programme for the banks that would issue loans on preferential terms to small and mediumsized enterprises affected by restrictions. We have also recommended that banks and microfinance organisations should approve 3/4  BIS central bankers' speeches  restructuring applications for those individuals and entrepreneurs who need this. I will now speak about our future decisions. It has become more probable that the level of the key rate will be higher, and the period during which the key rate might stay at this elevated level will be longer than we assumed in our previous forecast. According to our baseline forecast, the key rate will average 7.3–8.3% per annum next year, and 5.5–6.5% per annum in 2023. In other words, the key rate will return to its long-term neutral range no earlier than in the middle of 2023. Thank you for attention. 4/4  BIS central bankers' speeches