Norges Bank Proves Its Hawk Status as Rate Hike Moves Closer
(Bloomberg) -- Norway’s central bank brought forward the timing of what will probably be the rich world’s first cycle of interest rate hikes since the pandemic broke out.
The Oslo-based bank, which kept its main rate unchanged at zero on Thursday, as predicted, said it now expects to start raising its benchmark deposit rate in the “latter half” of this year.
Krone Gains as Norges Bank Adopts Faster Rate-Hike Path: TOPLive
“This implies a somewhat faster rate rise than projected in December,” when it indicated a first increase in early 2022, it said.
The bank, which roughly a year ago embarked on a series of emergency rate cuts to fight the pandemic, linked its optimism now to an expectation that “a large portion of the adult population in Norway will be vaccinated before the end of summer.”
The krone initially gained as much as 0.5% against the euro, but traded little changed by midday local time. Most economists had been expecting a slightly more hawkish tone from the bank, given the economic outlook.
What Bloomberg Economics Says...
“The central bank’s revised rate path now suggests the first hike will come in 4Q with two more to follow in 2022. We see the key rate at 1.5% by the end of 2024...Unlike its European peers, including the Bank of England and the European Central Bank, Norges Bank faces a relatively mild hit to resource utilization from the virus.”
---Johanna Jeansson, Nordic region economist
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An outlier among advanced economies, Norges Bank has long been expected to start winding back monetary support sooner than its peers. That’s in part thanks to record fiscal measures backed by Norway’s $1.3 trillion sovereign wealth fund, the world’s biggest. Without having to issue a single bond to pay for its economic relief package, Norway has avoided the deep crisis that engulfed most of Europe.
As the European Central Bank and the Riksbank of neighboring Sweden signal a protracted period of extreme stimulus, Norges Bank Governor Oystein Olsen is now piecing together a path toward more normal policy. He’ll do so after having managed to avoid unconventional measures such as quantitative easing or negative interest rates.
Norway’s finance ministry said this week its main scenario is for the economy to grow 3.7% this year, and 3.6% in 2022. That’s after ending 2020 just 1.4% smaller than before the pandemic hit (the economy of the euro zone shrank 6.8% last year).
“There is substantial uncertainty surrounding the economic recovery ahead, but there are prospects that economic activity will approach a normal level earlier than projected in the December 2020 Monetary Policy Report,” Norges Bank said.
The bank said it “placed weight” on the effect low rates are already having on output and employment levels. It also pointed to the krone’s appreciation and the likelihood of “moderate” wage growth as reasons to expect inflation to “move down ahead.”
Finally, Norges Bank said it “placed weight on the marked rise” in house prices since spring 2020.
“A long period of low interest rates increases the risk of a build-up of financial imbalances,” it said.
©2021 Bloomberg L.P.