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Norway Monetary Policy December 2021

Norway: Norges Bank delivers second rate hike in December meeting

At its 15 December monetary policy meeting, the Executive Board of Norges Bank unanimously voted to increase the sight deposit rate by 25 basis points to 0.50%, after raising it from 0.00% at its 22 September meeting. The latest decision was largely in line with market analysts’ expectations.

Norges Bank noted that conditions have continued to improve, as shown by high-frequency data—capacity utilization is estimated to be above its normal level and the unemployment rate has continued to decrease. The Bank noted that while the recent spike in infection rates and associated containment measures will dampen activity somewhat in the near term, momentum will pick up again once infections subside and curbs are eased. Regarding prices, the Bank said that higher electricity costs have pushed up price pressures, but underlying inflation has remained below its target. That said, the Bank expects core inflation to be bolstered ahead by increasing wage growth and higher imported goods inflation. Consequently, it assessed that a rate hike was necessary to stabilize inflation and bring it back down to its target.

In terms of forward guidance, the Bank stated that the recent developments regarding the pandemic have changed the balance of risks. It noted that if the health situation requires longer and more stringent containment measures that weigh on activity until spring 2022, further rate increases could be postponed. On the other hand, if domestic wages and prices rise more than expected, the Bank could raise the sight deposit rate at a brisker pace. Regardless, Norges Bank hinted that the next rate hike could be delivered at the March meeting. As such, most of our panelists have penciled in another 25 basis-point hike during Q1 2022 and see the sight deposit rate ending next year at 1.25%.

James Smith and Francesco Pesole, economists at ING, added:

“Energy prices are a critical input into the Norges Bank’s thinking. And with oil prices well supported and gas prices continuing to rise, policymakers clearly felt that further tightening made sense this month, despite Omicron. […] The notion that Norges Bank is currently by-and-large overlooking new Covid-related risks and remains on track for its 2022 tightening cycle is set to keep the NOK an attractive currency in periods of calm risk sentiment.”

The next monetary policy rate decision is set to be announced on 20 January.

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