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Norway Monetary Policy March 2022

Norway: Norges Bank hikes rate in March as expected

At its 23 March monetary policy meeting, the Executive Board of Norges Bank unanimously voted to increase the sight deposit rate by 25 basis points, bringing it to 0.75%. The decision, which met market analysts’ expectations, marked the third rate hike since policy normalization started in September 2021, and was also the first under the tenure of the new Central Bank Governor Ida Wolden Bache, who took office on 1 March.

Norges Bank’s decision was due to high inflationary pressures, with the country’s robust economic performance providing room for the hike. Following the scrapping of Covid-19 measures, data shows that both employment levels and capacity utilization have continued to increase. Despite high uncertainty brought about by the war in Ukraine, expectations are that activity will continue to expand. Moreover, inflation as well as headline and core inflation expectations have risen, sustained by stronger expectations for wage and imported goods inflation.

In terms of forward guidance, Norges Bank took a more hawkish turn, hinting at more hikes until the end of 2023, with the next hike expected at the June meeting. Assessing the balance of risks, the Bank noted that it “was concerned with the prospect that the war in Ukraine could result in weaker-than-expected global growth amid rising inflation. The Committee was also concerned with the risk of accelerating price and wage inflation as a result of capacity constraints in the economy and persistent global price pressures.” The Bank stated that if high inflation expectations persist, the rate could be increased more rapidly. The majority of our panelists see the sight deposit rate ending the year at 1.50%.

James Smith and Francesco Pesole, analysts at ING, commented:

“Norges Bank has considerably upgraded the number of rate hikes it expects to implement by the end of 2023. The central bank now projects seven further moves—so one a quarter—until the end of next year, up from the four it had previously pencilled in. […] The surge in energy prices is a boon for Norway’s energy-intensive economy, though interestingly the central bank points out that this time it may be less consequential for growth than in the past decade, where tax changes meant we saw considerable investment in the energy sector. The increase in interest rate expectations elsewhere, notably for the Federal Reserve, is also a clear hawkish factor for Norway—and in fact, the monetary policy report reveals that at least one of those three additional hikes now being pencilled in by Norges Bank is exclusively because of higher swap rates overseas.”

The next monetary policy rate decision is set to be announced on 5 May.

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