Norwegian Central Bank opposes proposal to grant Emergency Borrowing Rights to the Norwegian Government
In recent developments, the Norwegian Ministry of Finance has proposed that the Norwegian government be granted the authority to instruct the Norwegian Central Bank (Norges Bank) to provide temporary credit to the state during extraordinary crises. The rationale is clear: in situations such as war, terrorism, pandemics, or natural disasters, the state may face urgent liquidity needs to finance critical public functions. Proponents of the proposal argue that having a pre-approved mechanism for emergency borrowing would allow the government to act swiftly without waiting for ad-hoc market solutions.
The proposal suggests an exception to the current absolute prohibition under the Norwegian Central Bank Act (section 3-8), which only permits very short-term credit—loans with a duration within a calendar day. Instead, it would enable the government—either through parliament or, if time is of the essence, via the King in Council—to direct Norges Bank to provide temporary credit when the specific conditions outlined in section 7, third paragraph of the state’s Pension Fund Act are met. This, they argue, would serve as a vital financial lifeline in times of crisis.
However, Norges Bank has voiced strong reservations. In its response to the proposal, the central bank’s executive board asserts that allowing direct state borrowing—even on a temporary basis—could undermine a fundamental principle: central bank independence. According to Norges Bank, the longstanding prohibition against lending directly to the state is a critical safeguard. It ensures that the state does not finance its expenditures merely by triggering the printing of money, a practice that could erode monetary policy credibility and destabilize the economy.
Norges Bank emphasizes that international standards and practices—reflected in both EU regulations and recommendations from institutions like the Bank for International Settlements—strictly prohibit central banks from providing direct credit to governments. Norges Bank’s response also points out that the proposal has not been sufficiently explored or analysed. It questions whether the state’s liquidity needs in crisis situations might be better addressed through other channels rather than through an exception that risks blurring the clear separation between fiscal policy and monetary policy.
Moreover, the Bank warns that even short-term exceptions could create unintended economic incentives for the state to rely on central bank credit rather than managing its fiscal resources prudently. By maintaining the prohibition, Norges Bank believes it can better uphold the integrity and credibility of its monetary policy, which is essential for long-term economic stability.
In summary, while the Ministry of Finance’s proposal aims to provide a pre-emptive tool for emergency financing, Norges Bank remains firmly opposed. Norges Bank’s stance is that safeguarding central bank independence and adhering to international best practices are paramount. As the debate unfolds, both sides acknowledge the importance of a robust crisis management framework—but they differ significantly on the role that direct central bank lending should play in that framework.
Responses to the Consultation Note were due by 31 January 2025, and it is anticipated that a proposal for legislative amendments will be submitted to parliament in the first half of 2025.
For further insights and detailed commentary, please refer to the official documents released by Norges Bank and the Norwegian Ministry of Finance.
Sources:
Consultation Note (Ministry of Finance) – Case: 23/1645, 5 November 2024, Amendments to the Central Bank Act.
Consultation Response (Norwegian Central Bank) – Proposal for Certain Amendments to the Central Bank Act.
