Norway Sticks With Rate-Hike View for 2021 as Growth Resumes

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Norway’s central bank says it’s still on track to begin the first interest-rate tightening cycle of the advanced world since the coronavirus crisis struck.

The Oslo-based Norges Bank kept its benchmark deposit rate at zero on Thursday, as predicted by all economists in a Bloomberg News survey. Officials reiterated guidance that vaccination progress should allow them to hike later in 2021, while signaling they no longer consider uncertainty over the economy’s recovery as “substantial.”

Norway Sticks With Rate-Hike View for 2021 as Growth Resumes

That change in wording suggests officials might deliver a rate increase in September rather than waiting any longer, according to Nordea analysts Dane Cekov and Kjetil Olsen.

“The central bank has likely become more confident seeing that activity is beginning to normalize in countries where a large share of the population have been vaccinated,” they wrote in a report. “Hence, uncertainty for them is lower than it was in March.”

Norway’s proximity to policy tightening contrasts with peers throughout the region such as the European Central Bank, which remains heavily committed to emergency stimulus. While the crisis forced borrowing costs there down to a record low a year ago, the nation hasn’t needed to deploy more unconventional policy such as asset purchases or negative rates.

While the Danish central bank raised its key interest rate in March to prop up the krone and defend its peg to the euro, that didn’t augur a formal shift to a tightening stance, in contrast to the outlook in Norway.

The krone, which is the second-biggest gainer in the G-10 sphere of major currencies this year, was little changed after the decision on Thursday.

Despite a double hit from the pandemic and an historic plunge in crude prices last spring, the oil-rich Nordic nation has weathered the pandemic better than most in Europe, thanks in large part to generous welfare systems and widespread digitalization.

“The authorities’ plan for the further reopening of society appears to be broadly as we envisaged in March,” the central bank said. There is uncertainty surrounding the use of some vaccines, but for now it does not appear that there will be substantial delays.”

What Bloomberg Economics Says...

“We expect a rebound in growth in 2Q will allow the central bank to liftoff in December and hike twice in 2022. The key rate should reach 1.5% by the end of 2024.”

--Johanna Jeansson, economist. Click here for the full REACT.

Fiscal policy has borne the brunt of the adjustment in Norway, with its $1.3 trillion sovereign wealth fund -- the world’s biggest -- backing the government’s record support measures.

While core inflation has exceeded the central bank’s 2% aim for more than a year, policy makers have stuck to their view that it will slow below that level next month. At the same time, uncertainty from the pandemic is still clouding officials’ view. Crisis restrictions slowed economic activity at the start of the year by more than the bank had expected.

©2021 Bloomberg L.P.

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