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Norway Monetary Policy June 2023

Norway: Norges Bank surprises markets on the upside by accelerating pace of tightening in June

At its 22 June meeting, the Executive Board of Norges Bank unanimously voted to accelerate the pace of its tightening cycle, delivering a 50 basis point increase to bring the sight deposit rate to 3.75%. The move, which surprised markets on the upside—Norges Bank had hinted the rate would be raised to 3.50% in the summer—followed May’s 25 basis point rise. The rate now stands at the highest level since October 2008.

The decision was driven by persistently high and above-target inflation. Inflation surpassed Norges Bank’s projections in its March report, prompting the Bank to deviate from its policy course and raise interest rates more than previously anticipated. A weaker Norwegian krone and higher-than-expected wage growth have driven inflation. Moreover, domestic activity has remained high and the labor market is tight.

Norges Bank’s forward guidance grew more hawkish in its latest communiqué. Rate increases are seemingly far from over, and the Bank stated that the policy rate would likely reach 4.25% in the autumn. Given the current assessment that risks to the inflationary outlook are significantly skewed to the upside, Norges Bank hinted that the sight deposit rate would likely be raised once again at its next meeting on 17 August. Our panelists’ views align with the Bank’s expectations; they have penciled in further hikes during H2.

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