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Norway Monetary Policy January 2022

Norway: Norges Bank holds fire in first meeting of the year

At its 19 January monetary policy meeting, the Executive Board of Norges Bank unanimously voted to maintain the sight deposit rate at 0.50%, after raising it to that level from 0.25% in December. The decision met market analysts’ expectations.

Norges Bank’s decision was based on the fact that, while the economy’s upturn continued throughout autumn, higher infection rates and containment measures reinstated in response have hindered activity in recent weeks. More specifically, unemployment levels have ticked up and high-frequency data reveals a decline of activity, especially in the services sector. Furthermore, Norges Bank noted that while the number of hospitalizations has not increased in accordance with the elevated infection rates, uncertainty surrounding the pandemic remains. Turning to price pressures, the Bank noted that core inflation had increased more than expected, nearing its target, while headline inflation was also higher than expected and continued to be bolstered by high energy prices.

In terms of forward guidance, the Bank hinted that it would hike rates at the end of the first quarter, stating that, “based on the Committee’s current assessment of the outlook and balance of risks, the policy rate will most likely be raised in March”. Inflationary pressures in December were higher than expected and the Bank believes that the gradual lifting of restrictions will lead to economic upswing. As such, most of our panelists have penciled in another 25 basis-point hike for Q1 2022 and see the sight deposit rate ending the year at 1.25%.

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

“The Central Bank was already forecasting at least three rate rises this year in its latest projections from December. It’s worth remembering that Norges Bank tends to set policy more mechanically than most. And based on pretty much all of the usual factors that feed into the Bank’s model, it looks like the next projection due in March will show both a faster pace of rate rises, and potentially a higher terminal rate, too.”

The next monetary policy rate decision is set to be announced on 24 March.

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