Norges Bank signals March rate hike

Norway’s central bank said today (January 20) that it “will most likely” increase interest rates at its next monetary policy committee meeting in March.

This was the MPC’s last policy meeting under governor Øystein Olsen, who will leave Norges Bank at the end of February. In September, the MPC increased its policy rate from 0% to 0.25%, hiking it again in December to 0.5%, where it remains.

Norwegian inflation, measured by a core index excluding energy and taxes, was 1.8% year-on-year in November, below the central bank’s 2% target. But inflation sharply increased from 1.3% in November, which the MPC said was driven by increases in consumer goods prices. Headline consumer price index inflation also rose year on year in December, to 5.3% from from 5.1% the previous month. The figures were boosted by higher energy prices, which rose year on year by 15.9%.

The MPC said the “objective of stabilising inflation around the target somewhat further out suggests that the policy rate should be raised towards a more normal level”. It added that “a gradual normalisation of the policy rate is consistent with continued high employment” and would “help counter a build-up of financial imbalances”.

This increase in the headline figure surprised some analysts, many of whom expected a slight decline. Capital Economics had forecast headline inflation would fall to 4.5%.

Higher energy prices drove Norway’s parliament to approve support measures subsidising 55% of household’s energy bills until March. These subsidies mean “inflation likely peaked in December”, says Rory Fennessy, economist with Oxford Economics.

Against a backdrop of higher inflation, most analysts expect the central bank to implement three of four 25 basis points increases in 2022, taking interest rates to 1.25% or 1.5%.

“After 12 years in the job, Øystein Olsen was never going to spring a surprise at his last meeting in charge of the Norges Bank,” says Andrew Kenningham, chief Europe economist with Capital Economics. “Whereas the bank’s plans to tighten policy were originally motivated by financial stability risks, consumer price pressures are a growing concern,” he adds.

Focused on inflation

The central bank said it was “concerned with the risk of a potential rise in domestic price and wage inflation due to capacity constraints and persistent global price pressures” and “the objective of stabilising inflation around the target somewhat further out suggests that the policy rate should be raised towards a more normal level”.

It noted the outlook remains uncertain due to the Covid-19 pandemic’s evolution.

Fennessy of Oxford Economics says the firm does not “expect recent pandemic developments to alter the bank’s course for hiking policy this year”.

Oxford Economics expects Norges Bank to implement three rate hikes in 2022, although the risks are tilted towards more if the pandemic abates and inflation dynamics remain strong.

Kenningham of Capital Economics says Norwegian GDP “was broadly in line with its pre-virus trend in November, which puts clear daylight between it and the eurozone, for example, which is still not back to its pre-virus level”. He expects Norges Bank to increase interest rates four times to 1.5% by the end of 2022.