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Norway Monetary Policy March 2021

Norway: Norges Bank holds rate at zero in March; hints at rate hike in second half of 2021

At its monetary policy meeting on 17 March, the Executive Board of Norges Bank unanimously decided to keep the sight deposit rate at 0.00%, marking the seventh consecutive meeting of unchanged rates.

The Bank’s wait-and-see approach came amid an uptick in inflation in recent months—consumer prices rose at the strongest pace in over two years in February—while the unemployment rate remains well above pre-pandemic levels. Nevertheless, the Board struck a positive tone in its communiqué, noting that activity has picked up since last year’s sharp downturn and prospects for a strong recovery over the summer look promising on an expected uptick in household demand. However, with Covid-19 infection rates still relatively high and associated containment measures continuing to inhibit activity, the Bank decided to maintain interest rates at zero.

Looking forward, the Bank took a notably more hawkish tone, stating that “the policy rate will most likely be raised in the latter half of 2021”, which is a somewhat faster rate hike than projected in its December statement.

Regarding the revised rate forecast, Christian Schnittker, economist at Goldman Sachs, commented:

“On balance, the Committee brought forward the timing of the first policy rate hike, now showing a 50% probability of a Q4 increase. Further out, the policy rate path was raised broadly in line with this earlier lift-off, and Norges Bank expects the policy rate to be 1.4% at end-2024, close to its pre-pandemic level. We continue to expect Norges Bank to hike at its December meeting, followed by another 25bp hike in 2022Q1.”

Meanwhile, James Smith and Petr Krpata, economists at ING, commented on the potential impact on the Norwegian krone:

“The krone is set to benefit from the most hawkish central bank in the G10 FX arena. A hint at the late 2021 rate hike was delivered (and is now in the price), but we see risks skewed to an earlier and a faster tightening cycle (i.e. two hikes possibly delivered this year, with the first one coming in late Q3). This points to the generally upbeat NOK prospects across the board, and also against its regional peer SEK, where the Riksbank is highly unlikely to hike interest rates either this year or next.”

The next monetary policy rate decision is set to be announced on 6 May.

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