Norway’s central bank left its policy rate at 1.0 percent but confirmed it remains on track to raise its rate again in June as the latest data shows higher-than-projected inflation while capacity utilization has been rising largely as expected.
In September 2018 Norges Bank (NB) raised its rate for the first time in over 7 years and then in March this year when it said it was likely to raise the rate again in the next 6 months to curb inflation from faster-than-expected economic growth and a weak exchange rate of the krone.
The March guidance by NB’s executive board was based on forecasts in its monetary policy report and today the central bank said data since then indicate little had changed.
“The outlook and balance of risks continues to imply a gradual increase in the policy rate,” NB said, adding the uncertainty surrounding global developments persist but capacity utilization is continuing to rise and inflation is higher than projected.
“The Executive Board’s current assessment of the outlook and balance or risks suggests that the policy rate will most likely be raised in June,” NB Governor Oeystein Olsen said in a statement.
The executive board is scheduled to announce its next policy decision on June 20 when the central bank also updates its economic forecast.
In a separate speech to the parliament, Olsen said the central bank’s plan was to move gradually to a more normal interest rate level, with the prospect the policy rate would rise to 1.75 percent by the end of 2022.
This, however, means the average residential mortgage rate could rise to 3.5 percent from 2.6 percent in March so “we therefore believe that interest rates will not be as high as in previous upturns.”
Olsen also said the risk outlook is dominated by global developments, including rising protectionism and political uncertainty that weigh on global growth, and if trade tensions depend, growth among trading partners may be lower than projected in March.
“The uncertainty surrounding global developments and the effects of monetary policy suggests a cautious approach to interest rate setting,” Olsen said to parliament’s committee on finance and economic affairs.
Since the middle of last year Norway’s inflation rate has decelerated but remains above the central bank’s 2.0 percent target.
In March headline inflation eased to 2.9 percent, continuing to decline from December’s 3.5 percent but core inflation rose to 2.7 percent from 2.6 percent in February.
In its March quarterly monetary policy report, the central bank raised its forecast for the policy rate from its December report but lowered it slightly further out, with the upward shift reflecting stronger domestic demand and a weaker exchange rate of the krone.
The downward revision of the rate path reflects the prospects for lower growth and a more gradual rate rise among Norway’s trading partners, changes illustrated by the recent dovish shifts by major central banks, such as the U.S. Federal Reserve, the European Central Bank and the Bank of Canada.
In the March policy report, NB’s policy rate was seen averaging 1.1 percent this year, up from December’s forecast of 1.0 percent, and 1.6 percent in 2020, up from 1.4 percent previously forecast.
But for 2021 the rate is forecast to average 1.7 percent, down from 1.8 percent, and then remaining at that level in 2022.
Despite its two rate hikes, Norway’s krone has been steadily depreciating against the U.S. dollar since February 2018 and was trading at 8.77 to the dollar today, down 0.7 percent this year.
Norges Bank issued the following press release: