(Bloomberg) -- Norway’s central bank raised its key interest rate to the highest level since 2009 and delivered a hawkish message of further tightening, citing recent currency weakness and a better-than-expected economy.
Norges Bank lifted its benchmark deposit rate on Thursday by 25 basis points to 3%, as forecast by all analysts in a Bloomberg survey. It projected the rate will rise to about 3.5% in the summer.
“The policy rate will be raised further in May” if the economy develops as currently anticipated, said Governor Ida Wolden Bache. The central bank is seeking to stem a wage-price spiral, as people are getting paid more than policymakers expected and an added inflationary headwind comes from further weakening of the krone.
The krone strengthened 0.6% against the euro to 11.2928 at 12:43 p.m. in the Norwegian capital. The market is now pricing in 40 basis points of additional hikes by July, according to Danske Bank A/S.
“Although we had expected a hawkish message from Norges Bank today, the trajectory was even more aggressive than anticipated,” Marius Gonsholt Hov, an economist at Svenska Handelsbanken AB, said in a note. “Norges Bank clearly addresses the exchange rate channel, in light of a krone exchange rate that has been significantly weaker than expected,” he said.
Norway’s currency has clocked in the worst performance among the Group of 10 most-traded global currencies this year. While growth is set to slow, the economy will avoid a recession, according to a new forecast from the central bank. Mainland gross domestic product, which excludes the offshore sector, will grow 1.1% this year, up from a previous estimate of a 0.2% contraction.
“We have to weigh the risks of tightening too little, thereby risking inflation getting entrenched at a higher level against the risk of tightening too much, which would affect the real economy,” Wolden Bache said in an interview.
The central bank now forecasts wages to rise 5.1% this year after gaining 4.3% last year, and sees that as one of the key contributors to price increases.
“Obviously higher wage growth will mean higher cost for firms, which will imply higher inflation going forward,” said the governor. “So higher wage growth is one of the factors contributing to lifting our inflation forecasts and thereby the need to tighten monetary policy more than we envisaged in December.”
Firm Signal
The decision was “hawkish” with a “firm signal of more hikes to come,” said Kristoffer Kjaer Lomholt, head of FX and corporate research at Danske. The new top-point of 3.6% in the rate path and the verbal guidance point to 25 basis-point hikes in May and June and a roughly 40% probability of a final 25 basis-point hike in September,” he said.
Norges Bank was the first among major currency holders to start raising rates in September 2021. Uncertainty regarding its decision has been heightened by financial-market disruption in the wake of US bank failures and the takeover of Credit Suisse Group AG. The move follows a quarter-point hike by the Federal Reserve on Wednesday while the Swiss National Bank raised by 50 basis points earlier on Thursday.
Addressing the banking turmoil that’s spread from the US to Europe, Wolden Bache told reporters that the country’s banks display no sign of liquidity problems.
“We see no sign now that Norwegian banks have liquidity problems or of larger contagion effects in other parts of the financial system in Norway,” the governor said. The bank’s forecasts assume that the country won’t see a significant tightening of conditions as a result of the turmoil.
--With assistance from Joel Rinneby.
(Updates with comments from the governor from seventh paragraph.)
©2023 Bloomberg L.P.
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