Norway raises rate, as expected, sees December hike

     Norway's central bank raised its key interest rate for the first time in two years, as it had signaled in recent months, and said it would most likely raise the rate again in December as the economy was now normalizing and economic activity higher than before the COVID-19 pandemic struck.
     Norges Bank (NB) raised its policy rate by 25 basis points to 0.25 percent, the first rate hike since September 2019, and the first change in rates since May last year when the rate was slashed for the third time in three months to support economic activity during the pandemic.
     "A normalizing economy now suggest that it is appropriate to begin a gradual normalization of the policy rate," said Governor Oeystein Olsen, who last month said he would step down at the end of February 2022 after turning 70.
     Olsen became governor of NB in 2011 and is in his second six-year term.
     NB has been transparent in informing investors and financial markets of its intent to tighten monetary policy. 

     In March this year NB pulled forward the date for a rate hike to the second half of this year from the first half of next year, and in June the central bank then said it would most likely raise the rate in September as economic activity was bouncing back faster than expected.

     This forecast was confirmed last month.
     NB said the economic upswing was likely to continue through the autumn, with increasing economic activity and rising wages helping push up inflation towards the bank's 2.0 percent target.

     In its updated monetary policy report, NB raised its forecast for economic growth this year to 3.0 percent from June's forecast of 2.9 percent and the 2022 forecast to 3.8 percent from 3.6 percent.

     In the second quarter of this year Norway's gross domestic product jumped 6.1 percent year-on-year.

     Norway's inflation rate has hovered around 3 percent most of this year and rose to 3.4 percent in August and NB raised its forecast for inflation to average 3.2 percent this year from 2.8 percent.

     For 2022 inflation is seen averaging 1.5 percent, up from June's forecast of 1.1 percent.

     "Based on the Committee's current assessment of the outlook and balance of risks, the policy rate will most likely be raised further in December," Olsen said.

     The path of the policy rate in coming years was raised, with NB forecasting an average 0.1 percent this year and then 0.9 percent in 2022, up from the previous forecast of 0.8 percent.

      In 2023 NB expects the policy rate to average 1.4 percent in 2023, up from from 1.3 percent, and then 1.6 percent in 2024, also 0.1 percent higher than forecast in June.

     Commenting on the balance of risks, NB's monetary policy and financial stability committee said there was still a risk the pandemic would have a lasting impact on employment, which favors supporting economic growth, while capacity constraints may result in higher prices and wages.

     "Nevertheless, the Committee judges that the risk of inflation becoming too high is limited," NB said.

     Norges Bank issued the following statement:

"Norges Bank’s Monetary Policy and Financial Stability Committee has unanimously decided to raise the policy rate from zero percent to 0.25 percent.

“A normalising economy now suggests that it is appropriate to begin a gradual normalisation of the policy rate,” says Governor Øystein Olsen.

The reopening of society has led to a marked upswing in the Norwegian economy, and activity is now higher than its pre-pandemic level. Unemployment has fallen further, and capacity utilisation appears to be close to a normal level. Infection rates have risen after summer, but a high vaccination rate has reduced the need for Covid-related restrictions. The economic upswing will likely continue through autumn. Underlying inflation is low, but increased activity and rising wage growth will help push inflation up towards the inflation target of 2 percent.

A normalising economy suggests that there is no longer a need to maintain the current degree of monetary accommodation. The objective of countering the build-up of financial imbalances also suggests higher interest rates. Uncertainty surrounding the effects of higher interest rates warrants a gradual rise in the policy rate.

In its discussion of the balance of risks, the Committee was concerned with the uncertainty surrounding the evolution of the pandemic and the restraining effect that new virus variants could potentially have on the economic upturn. At the same time, there is still a risk that the pandemic will have lasting consequences for employment. This favours supporting economic growth to enable the unemployed to return to work more quickly. On the other hand, capacity constraints may result in faster-than-expected price and wage inflation. Nevertheless, the Committee judges that the risk of inflation becoming too high is limited.

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

The policy rate forecast implies a gradual rate rise in the coming years. The policy rate path is a little higher than in the June 2021 Monetary Policy Report."

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