(Bloomberg) — Norway’s central bank raised borrowing costs to the highest level since 2008 and signaled more tightening to come as the krone’s weakness stokes inflation.
(Bloomberg) — Norway’s central bank raised borrowing costs to the highest level since 2008 and signaled more tightening to come as the krone’s weakness stokes inflation.
Norges Bank lifted its deposit interest rate by a quarter percentage point to 3.25% on Thursday, as forecast by all economists in a Bloomberg survey. Officials said the benchmark will “most likely” be raised further next month, in line with the March projection of reaching 3.5% level by the summer.
“The krone has been weaker than forecast, and krone weakness means prices of imports rise which in isolation can mean that a higher rate than presumed earlier may be needed,” Governor Ida Wolden Bache told reporters in Oslo. She added the policy makers “always look at this in combination with other information about the Norwegian economy,” while they haven’t yet seen the “full effect” of previous hikes.
Norway’s currency rallied after the central bank announcement, which raises the prospect that one of the advanced world’s first tightening campaigns since the pandemic struck may also stand out for its extended duration.
The Federal Reserve hiked by a quarter point on Wednesday and hinted at a possible pause, albeit after a more aggressive series of rate hikes. The European Central Bank is likely to raise by a similar amount on Thursday, with the possibility of further steps to come.
While Norway has taken a more gradual approach to tightening than such global peers, officials find themselves bound to keep going as inflation exceeds forecasts and their currency under-performs its rich-world counterparts. Wolden Bache cited lower rate differentials with global peers, declining oil prices and higher global uncertainty as the key reasons behind the weaker krone.
“A higher rate top than previously envisaged is likely,” Nordea Bank Abp’s economists Dane Cekov and Kjetil Olsen said in a note to clients. “If Norges Bank had made new forecasts today, the peak rate would likely be higher, in the range 3.75-4.00% compared to a rate top around 3.60% in the March rate path.”
The krone strengthened following the Norwegian decision, trading 0.6% higher at 11.8291 versus the euro at 11:20 a.m. in Oslo. It remains the worst-performing major currency so far this year.
Inflation is “high and markedly above the target” of 2%, officials said. “Higher wage growth and the krone depreciation will contribute to keeping inflation elevated ahead.”
It’s the currency that may be the most pressing worry for policymakers. The krone, historically tracking oil prices, is close to its lowest versus the euro since March 2020. It has been the biggest decliner this year versus both the dollar and the euro among the G-10 group of the world’s most-traded currencies.
No new economic outlook or projections on the path of interest rates accompanied Thursday’s decision because it was only a so-called interim meeting.
–With assistance from Zoe Schneeweiss, Joel Rinneby, Greg Ritchie and Stephen Treloar.
(Updates with governor’s comments at news conference, analyst comments.)
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