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22/06/2023 15:30

Norway central bank hikes rate to 15-year high, with more to come

In a move aimed at tackling inflation, Norway's central bank raised its key policy rate by 50 basis points (bps) to reach a 15-year high of 3.75%. The bank also indicated its intention to implement another rate hike in August, with a projected increase to 4.25% during the autumn. This decision exceeded expectations, as a majority of economists had predicted a 25 bps increase.

Governor of Norges Bank, Ida Wolden Bache, stated that failing to raise the policy rate could lead to continued rapid increases in prices and wages, further entrenching inflation. Norway's core inflation reached a record high of 6.7% in May, surpassing the central bank's forecast of 6.0%.

Following the announcement, the Norwegian currency, the crown, experienced a surge against the euro. Norges Bank explained that a higher policy rate than previously indicated is necessary to bring inflation back to its target level. However, it cautioned that if the crown weakens more than expected or economic pressures persist, the policy rate may need to be increased beyond current projections.

Norges Bank noted that the full impact of previous rate hikes is not yet apparent in the economy. If inflation declines more rapidly or if there is a notable economic slowdown, the policy rate may be lower than currently envisioned.

The decision to raise rates demonstrates Norges Bank's commitment to addressing concerns about entrenched inflation. Analysts at Nordea commented that the move was justified given the significantly higher-than-anticipated inflation. This hike brings the policy rate to its highest level since the global financial crisis in 2008.

While Norway was one of the first Western countries to raise rates after the pandemic, its pace of tightening has been slower compared to the neighboring eurozone, which has put pressure on the Norwegian crown. The currency has weakened by 8% on a trade-weighted basis this year, contributing to inflation. Some analysts believed that a 50 bps hike could help stabilize the currency, whereas a 25 bps increase would have been less effective.

In contrast to Norway's decision, the European Central Bank recently raised its key policy rate and is expected to continue with further hikes, while the U.S. Federal Reserve has maintained borrowing costs but signaled its intention to resume its tightening campaign.