Norway: Key policy rate left unchanged in June, but a hike in September looks almost certain
At its monetary policy meeting held on 20 June, Norges Bank’s Executive Board stood pat and left the key policy rate at its all-time low of 0.50%, where it has been since March 2016. The decision was in line with market expectations.
The economy appears in a solid position as accommodative monetary policy conditions, a tight labor market, high hydrocarbon prices and expansionary fiscal policies support growth. Against this backdrop, the Central Bank raised its growth forecast for 2018 to 2.0% from 1.9% in March, when it last released its quarterly Monetary Policy Report. The increase was likely because of higher Brent Crude Oil prices than previously expected.
Although inflation ticked down to 2.3% in May from 2.4% in April, it remained above the 2.0% target for the fourth consecutive month. Norges Bank also raised its inflation forecast for 2018 to 2.3% from 2.1% in March amid higher oil prices. However, core inflation continued to be subdued in May at 1.2% (April: 1.3%)—likely a factor in keeping the key policy rate unchanged. All in all, and despite the mounting reasons for a hike, the Central Bank did not feel that the economic outlook and balance of risks prompted immediate action in June.
Norges Bank provided clear forward guidance in its communiqué. The Central Bank said it will “most likely” raise the key policy rate in September, compared to previous guidance of a possible rate hike “after summer 2018”. Such a rise, the Bank said, should also help restrain house price inflation and household debt growth.