Norway: Norges Bank hikes the key policy rate for the first time since 2011
September 20, 2018
On 20 September, Norges Bank announced it was raising the key policy rate to 0.75% from the previous all-time low of 0.50%, effective 21 September. The decision to tighten monetary policy for the first time in eight years was in line with market analysts’ expectations following accelerating inflation and strong economic growth in recent months.
Inflation hit 3.4% in August, the highest rate in over one-and-a-half years and above the 2.0% target set by Norges Bank. Core inflation—which excludes tax changes and energy prices—hit 1.9% in August, just under the 2.0% target. In addition, a tight labor market suggests that wage growth will further contribute to inflationary pressures in the coming months. In terms of the economy more broadly, output growth accelerated in the second quarter of this year and, going forward, the economy is likely to maintain its momentum thanks to high employment and substantial investment in the hydrocarbon sector. These factors, coupled with the clear forward guidance that has been provided by Norges Bank in recent months, left ample room for a tightening of monetary policy in September.
In terms of forward guidance in September, Norges Bank said that, based on its current assessment of the outlook, “the key policy rate will most likely be increased further in [Q1 2019]”. Contributing to this is the fact that leaving interest rates too low for too long might cause inflation to accelerate significantly from its current level and cause financial imbalances to build up. Meanwhile, the Central Bank cautioned that global trade protectionism and volatility in the price of oil is creating economic uncertainty, suggesting that it could delay the next hike if these uncertainties negatively affect the economy. The next interest rate announcement will be made on 25 October.
Norway Interest Rate Forecast
FocusEconomics Consensus Forecast panelists expect the key policy rate to end 2018 at 0.76%. For 2019, panelists expect the rate to end the year higher at 1.27%.
Author: Edward Gardner, Economist