The Norges Bank hiked its benchmark interest rate to 0.25% on Thursday (Sept. 24) and signaled a further hike in December, becoming the first major Western central bank to raise interest rates since COVID-19 struck. The decision was in line with economists’ expectations.
The key interest rate had been at a record low of 0% since May 2020, when Norway’s central bank slashed interest rates by 1.5% in a matter of weeks to combat the impact of the coronavirus-related shutdowns.
“A normalizing economy now suggests that it is appropriate to begin a gradual normalization of the policy rate,” Norges Bank Governor Oystein Olsen said in a statement. “Based on the Committee’s current assessment of the outlook and balance of risks, the policy rate will most likely be raised further in December,” he added.
Norway, the richest Nordic economy on a per-capita basis, has been relatively spared throughout the COVID-19 crisis.
Norges Bank has managed to avoid resorting to unconventional policy measures such as negative interest rates or asset purchases, thanks to the country’s $1.4 trillion sovereign wealth fund, the world’s largest, which has been available to deliver record budget stimulus.
The Scandinavian country’s economy has already returned to pre-pandemic levels. Unemployment has fallen more than expected while the central bank’s Regional Network report last week showed a rise in business sector activity.
Policymakers also said on Thursday that the risk of too-high inflation is “limited.” Increased activity, rising employment, and rising wages are forecasted to push inflation towards the target of 2%, they noted.
The central bank raised its growth outlook for this year. Annual mainland GDP growth was projected at 3.9% in 2021 after a 3.1% contraction in 2020. High GDP growth (4.5%) is also expected to continue in 2022. The bank also projected core inflation to hover around 1% in the coming period, before rising to close to 2% towards the end of 2024.
Norges Bank’s announcement represented “yet another hawkish tilt” on monetary policy, Nordea Markets said in a note.
“ Given Norges Bank’s history of going against the wider G10 central bank trend, there’s no reason to doubt this hawkish outlook for now. We expect NOK to emerge as a key outperformer in risk-on periods thanks to its attractive yield profile” ING economists James Smith and Francesco Pesole wrote.
“We now expect the bank to raise rates once per quarter next year”, which “would take the rate back to the pre-pandemic level of 1.50 per cent by the end of 2022,” Capital Economics said.
Many of the world’s central banks are now laying the groundwork for a transition to life with less stimulus. Brazil, Russia, Mexico, South Korea, the Czech Republic and Iceland have already raised their interest rates this year.
In the United States, the Federal Reserve on Wednesday (Sept. 22) said it will likely begin reducing its monthly bond buying as soon as November and signaled interest rate increases may follow more quickly than expected.
The European Central Bank is dialing back stimulus, but ECB officials insist that isn’t a taper and an actual rate move is expected to be still some way off.
After Norges Bank’s policy decision release, Norway’s currency rallied to its highest levels since June against the euro, and gained 0.7% against the U.S. dollar.
