Norway's central bank hikes rates for fourth time in a year
Norway’s central bank broke further away from the pack, delivering its fourth interest-rate increase in a year in an effort to cool an economy stoked by oil investments.
Norges Bank raised its benchmark rate by a quarter of a percentage point to 1.50 per cent on Thursday, the highest level in almost five years. Four of the six biggest Nordic banks had expected the move, but most other forecasters didn’t.
The krone rose as much as 0.5 per cent against the euro but then pared those gains as the central bank of western Europe’s biggest oil producer signaled it was unlikely to deliver more tightening for now.
“The executive board’s current assessment of the outlook and balance of risks suggests that the policy rate will most likely remain at this level in the coming period,” Governor Oystein Olsen said in a statement.
Though some market participants expected this move, “it’s nonetheless remarkable that a central bank is going completely against the flow and raising rates, while central bankers across the world are in the process of cutting,” said Frederik Engholm, chief strategist at Nykredit in Copenhagen.
Dubbed by local economists as one of the “last hawks,” Norges Bank has stood out for its commitment to tightening as both the European Central Bank and the Federal Reserve deliver more stimulus. Fed Chairman Jerome Powell on Wednesday pointed to the fallout of a global trade war as something that should give monetary policy makers pause.
Olsen presented Norway’s rate decision on a day full of central bank announcements. Moments earlier, the Swiss National Bank had kept its main rate at a record low of minus 0.75%, following a cut by the Fed late on Wednesday.
Norway’s decision shows that “the rate path is marginally lower from June and signals that Norges Bank is basically done hiking rates,” said Joachim Bernhardsen, an analyst at Nordea in Oslo, said in a note to clients. “However, they maintain a small hiking bias indicating that a hike is more likely than a cut next year.”
Martin Enlund, chief analyst at Nordea in Stockholm, drew attention to the history of adjustments to the rate path made by Norges Bank.
The Norwegian economy has so far proved resilient. That’s allowed the government, which is backed by the world’s largest sovereign-wealth fund, to provide the kind of stimulus that most other European nations can only dream of. Norway will spend the equivalent of almost eight per cent of GDP this year to plug a budget shortfall. Against that backdrop, unemployment has stayed below 4% and inflation is above target.
“The policy rate forecast indicates a slightly smaller rate rise than in the June Report. Weaker growth prospects and lower interest rates abroad have contributed to the downward revision. Slightly lower inflation and a somewhat less tight domestic labor market compared with the June projections have also pulled down the rate path. A weaker-than-projected krone has in isolation pulled up the policy rate path. With a policy rate in line with the forecast, inflation is projected to remain close to the inflation target in the years ahead, at the same time as unemployment remains low. The policy rate path will be adjusted in response to a change in economic prospects or the balance of risks.”
Olsen has avoided unconventional policies, such as negative rates and asset purchases, and instead opted for a strategy he calls “leaning against the wind” to fight financial imbalances. Recent gains in the price of oil and a persistently weak Norwegian krone underpin the central bank’s commitment to tightening.