(Bloomberg) — Norway’s central bank accelerated interest-rate increases and pledged more aggressive tightening, intensifying its response to stubborn inflation and a weak currency.
(Bloomberg) — Norway’s central bank accelerated interest-rate increases and pledged more aggressive tightening, intensifying its response to stubborn inflation and a weak currency.
Norges Bank lifted its key deposit rate on Thursday by 50 basis points to 3.75%, prompting the krone to post its biggest advance in two weeks.
The decision outcome was anticipated by a large minority of economists, with the rest predicting a smaller move. This is the 11th hike in the Norwegian benchmark since September 2021.
Officials said the rate will “most likely be raised further in August,” and they sharply raised their projection for borrowing costs, seeing a peak at 4.25% later this year.
“Today’s hawkish decision shows that Norges Bank means business and is concerned about inflation,” Nordea analysts Dane Cekov and Kjetil Olsen said in a report. “The decision is justified, given that inflation has come in markedly higher than anticipated.”
Norwegian policymakers have opted for more aggression to curb consumer-price gains at a time when recent data show households and companies in the fossil-fuel-rich nation remain relatively resilient to higher costs.
That chimes with the renewed alarm among global peers at the dangers posed by undefeated inflation. While the Federal Reserve has already tightened much further than Norges Bank, Chair Jerome Powell told lawmakers on Wednesday that officials may resume rate hikes in coming months, albeit at a moderate pace.
“If we do not raise the policy rate, prices and wages could continue to rise rapidly and inflation become entrenched,” the Norwegian governor, Ida Wolden Bache, said in a statement. “It may then become more costly to bring inflation down again.”
Still, she doesn’t see a price-wage spiral taking hold for now. Employees haven’t been compensated for past losses of purchasing power so far, Wolden Bache said in an interview with Bloomberg News.
The Norges Bank increase coincides with a busy day for global monetary policymakers. The Swiss National Bank dialed down hiking with only a 25 basis-point move, while the Bank of England raised by a half point and warned it may need to do lift borrowing costs further.
The krone — the second-worst performing currency in Group-of-10 currencies this year — strengthened as much as 1.6% against the euro after the decision. It pared gains to trade 1.1% stronger at 11.5862 per euro as of 1:14 p.m. in Oslo.
Norges Bank has previously explained the krone’s weaker-than-expected performance mainly by factors such as a declining rate differential with other central banks, and a lower oil price.
“We have seen over time that volatility and uncertainty in international financial markets have contributed to a risk premium on the Norwegian currency, but it’s in general difficult to pinpoint which factors contribute to a risk premium in that sense,” Wolden Bache said in the interview. “We expect that will narrow somewhat going forward, but we project a weaker exchange rate than we did in our previous report.”
The central bank raised its forecast for core inflation to 6.3% this year and 4.6% in 2024, with headline price growth remaining clearly above its 2% target even in 2026.
“Norges Bank seized the opportunity to signal its inflation target commitment,” Kyrre Aamdal, senior economist at DNB Bank ASA, said in a note to clients. “We find this reasonable and in line with our forecast.”
(Updates with governor’s comments starting in eighth paragraph)
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