Norway Delivers Rate Hike That Omicron Threatened to Derail
(Bloomberg) -- Norway’s central bank raised its interest rate for the second time this year and flagged another increase in March as officials acted to cool the rebounding economy despite renewed coronavirus concerns.
Norges Bank lifted its main rate by 25 basis points to 0.5% on Thursday, as forecast by 14 out of 15 economists surveyed by Bloomberg. Policy makers kept their path for future moves in the benchmark little changed, suggesting a “gradual” pace of increases in coming years.
The decision suggests officials overcame any last-minute concerns they might have had that new government measures to contain the omicron variant will constrict economic activity. In doing so, they cemented Norges Bank’s status as one of the most hawkish monetary authorities in the world’s advanced economies.
“The outcome comes somewhat unexpected for markets who had lost fate that Norges Bank would follow through due to Omicron related restrictions in Norway,” Nordea’s analysts Dane Cekov and Kjetil Olsen said in a note to investors, saying it was “a brave” move.
The krone, which has been the third-weakest performer in the G-10 currency space this quarter, rose by as much as 0.4% to 10.1198 per euro after the decision, before paring some gains. Investors now price in a full 25 basis point hike in 3 months, with three-month forward-rate agreements maturing in March rising to the highest level since pandemic, at 1.01%. They settle to the Norwegian interbank offered rate, which is at 0.75%.
Not far behind Norges Bank is the U.S. Federal Reserve, which on the eve of Norway’s decision accelerated its wind-down of stimulus and signaled three rate increases next year. By contrast, the emergence of the omicron variant may prompt the Bank of England to delay a potential hike on Thursday.
Norges Bank has long stood out for its hawkishness, and in September it became the first central bank among so-called G-10 nations with major currencies to tighten since the onset of the pandemic, when it delivered an initial rate increase.
Norway has weathered the crisis better than most, cushioned with the help of unprecedented fiscal stimulus that it was able to deliver with the resources available to it from the world’s biggest sovereign wealth fund.
That stimulus firepower has driven an economic recovery that has exceeded the central bank’s own projections. Job vacancies are setting records and wage expectations are rising as energy-driven inflation hits the fastest pace in 13 years.
Despite that backdrop and a rate hike that had been signaled for months, unexpected suspense surrounded the Norges Bank decision after the government announced two sets of new coronavirus restrictions within a week, raising the prospect that officials might delay the move.
“There is considerable uncertainty about the evolution of the pandemic,” central bank Governor Governor Oystein Olsen said in a statement. “But if economic developments evolve broadly in line with the projections, the policy rate will most likely be raised in March.”
The richest Nordic economy on a per capita basis was 2.2% above its pre-crisis level by September. The krone has been the second-weakest among the G-10 currencies this quarter, a factor that’s also supported a rate increase.
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