Categories: Economics & FundamentalsFinancial News

Norway keeps rate, says rate likely to be hiked in Sept.

June 18, 2021

Norway’s central bank left its monetary policy rate steady, as expected, but said it would most likely raise the rate September – the first rate hike in two years – as economic activity has bounced back faster than expected after the negative impact of COVID-19 last year.
Norges Bank (NB), which slashed its policy rate three times last year by a total of 1.50 percentage points to 0.0 percent, kept the rate at a rock-bottom level as there is still uncertainty about the pandemic and the overall outlook and balance of risk imply a continued expansionary monetary policy stance.

“There is still uncertainty regarding the evolution of the pandemic, but economic activity now seems to be rebounding sharply and somewhat faster than projected earlier,” NB said, with its governor, Oeystein Olsen, adding the policy rate “will most likely be raised in September.”

The bank’s monetary policy committee is scheduled to meet on Aug. 19 and then on Sept. 23, when it updates its monetary policy report, which is issued four times a year.

Encouraged by the recovery of economic activity, NB has been steadily pulling forward its first rate hike after the three rate cuts last year.

In December last year, for example, the central bank pencilled in the first hike in the first half of 2022 but then in March the rate hike rate was pulled forward to the second half of 2021.

In April, when the bank’s monetary and financial stability committee previously met, it also said the rate would most likely be raised in the latter half of 2021, and today narrowed down the date to September.

After economic activity in Norway came to a halt in March and April last year when the pandemic swept the globe, activity picked up in following months until the recovery once again stalled in the autumn and in the first months of this year when infection rates rose again.

But with infection rates declining and the pace of vaccinations picking up, Covid-restrictions are being lifted, with the reopening boosting economic activity as household consumption jumps, helped by accumulated savings, and investments also pick up, including in the oil-related industry.

Although underlining inflation is below the bank’s 2.0 percent target, NB said higher global inflation and inflation expectations are creating uncertainty about inflation ahead and continued low interest rates increase the risk of a build-up of financial imbalances, such as the marked rise in house prices.

Norway’s headline inflation rate has eased in the last three months to 2.7 percent in May from 3.3 percent in February with core inflation falling to 1.5 percent in May from a recent high of 3.7 percent in August last year.

Helped by the rise in the krone’s exchange rate since 2020 and prospects for moderate wage growth, NB expects inflation to remain below its target in coming years, forecasting headline inflation of 2.8 percent this year, unchanged from March, then 1.1 percent in 2020, also unchanged, and 1.3 percent in 2023, down from 1.5 percent.

After Norway’s gross domestic product bounced back in the third quarter of 2020, with quarterly growth of 4.3 percent, the growth rate slipped to 0.8 percent in the fourth quarter and minus 0.6 percent in the first quarter of this year for an annual contraction of 1.4 percent.

In 2020 mainland GDP shrank 3.1 percent but is forecast to grow 3.8 percent this year, unchanged from March, and then 3.6 percent in 2022, up from 3.4 percent, and 1.2 percent in 2023, unchanged.

Although the policy rate is still seen averaging 0.1 percent this year, the rate is seen rising to 0.8 percent in 2022, up sharply from the March forecast of 0.3 percent, and implying 3 rate hikes of 25 basis points.

In 2023 the rate is seen averaging 1.3 percent, implying another 2 hikes.

Norway’s krone has been strengthening steadily since November last year though it took a hit in recent days, as most other currencies, as the U.S. dollar rose after the U.S. Federal Reserve pulled forward its forecast for raising rates to 2023 from 2024.

The krone was trading at 8.5 to the dollar today, down 2.2 percent since the start of June, but unchanged on the year.

Norges Bank released the following press release:

“Norges Bank’s Monetary Policy and Financial Stability Committee has unanimously decided to keep the policy rate unchanged at zero percent.

“In the Committee’s current assessment of the outlook and balance of risks, the policy rate will most likely be raised in September”, says Governor Øystein Olsen.

Activity in the Norwegian economy has picked up after the sharp fall in spring 2020. At the beginning of 2021, higher infection rates and tighter Covid-related restrictions held back the recovery. Through spring, the pace of vaccination has accelerated, and the authorities have begun a gradual reopening of society. Unemployment has fallen but remains high. There is still uncertainty regarding the evolution of the pandemic, but economic activity now seems to be rebounding sharply and somewhat faster than projected earlier.

Underlying inflation has slowed and is now below the 2% target. Higher global inflation and inflation expectations are creating uncertainty about inflation ahead. However, the krone appreciation since 2020 and prospects for moderate wage growth suggest that inflation in Norway will remain below target in the coming years. As long as capacity utilisation is rising, there is limited risk of inflation becoming too low.

The Committee placed weight on the contribution of low interest rates to speeding up the return to more normal output and employment levels. This reduces the risk of unemployment becoming entrenched at a high level and helps return inflation towards the target. At the same time, a long period of low interest rates increases the risk of a build-up of financial imbalances. The Committee placed weight on the marked rise in house prices since spring 2020 but noted that house price inflation has recently moderated somewhat.

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In the Committee’s assessment, the overall outlook and balance of risks imply a continued expansionary monetary policy stance. Further easing of Covid-related restrictions will help a return to more normal economic conditions. This suggests that it will soon be appropriate to raise the policy rate from the current level.

The policy rate forecast is slightly higher than in the March 2021 Monetary Policy Report and implies a gradual rise from autumn 2021.”

www.CentralBankNews.info

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