Thursday, September 20, 2018

Norway raises rate 25 bps and sees next hike in Q1 2019

      Norway's central bank raised its policy interest rate for the first time in seven years and while it flagged another rate hike in the first quarter of 2019 it lowered the projected rate path and its growth forecasts due to rising global protectionism and turbulence in some emerging market economies.
      Norges Bank (NB) raised its key policy rate by 25 basis points to 0.75 percent. This was NB's first change in rates since March 2016 and the first rate hike since June 2011.
      Today's rate hike was widely expected by economists and follows the central bank's initial warnings in March that it was getting ready to raise rates in the second half of this year. In June and August the NB then said the rate would most likely be raised at today's board meeting.
      Initially Norway's krone fell in response to NB's outlook but quickly recovered to trade at 8.16 to the U.S. dollar, up from lows around 8.48 in mid-August and up 0.5 percent this year.
     "The Executive Board's current assessment of the outlook and balance of risks suggests that they key policy rate will most likely increased further in 2019 Q1," NB Governor Oeystein Olsen said.
     Olsen added the board was unanimous in its decision and was still taking a cautious approach in setting interest rates due to uncertainty surrounding the impact of higher rates.
     In an update to its economic projections, the central bank forecast the policy rate would average 1.0 percent next year, implying one rate hike, and then rise further to 1.5 percent in 2020, implying two more hikes.
     For 2021 NB forecast an average policy rate of 1.9 percent for another two hikes. For 2019, 2020 and 2021 the policy rate forecast was trimmed by 0.1 percentage point from the June forecast.
     Despite the growing risks to the global economy and slightly lower domestic economic growth than expected, the central bank said price and wage inflation may accelerate and financial imbalances may build up - raising the risk of a sharper economic downturn in the future - if rates were not raised.
     "Overall, the outlook and the balance of risks imply a gradual interest rate increases in the years ahead," Olsen said.
     However, NB also said global trade conflicts were dampening the economic upturn among its trading partners and in years ahead capacity constraints would like cause growth to slow.
     "Higher trade barriers and persistent uncertainty may weigh on import growth among Norway's trading partners, but may also lead to the krone remaining weaker than assumed," NB said.
      Norway's mainland economy was seen growing 2.5 percent this year, down from 2.6 percent previously forecast, and 2.5 percent in 2019, up from 2.3 percent forecast in June.
      In 2020 the economy is seen growing 1.8 percent and then 1.2 percent in 2021.
      The growth forecast for this year and next is in line with the International Monetary Fund's forecast for Norwegian mainland growth this year of 2.5 percent and 2.4 percent in 2019.
      Norway's economy has been expanding steadily since late 2016, boosted by the global upturn and higher oil prices, resulting in higher employment and wages, and thus household demand.
      In the second quarter of this year Gross Domestic Product grew by 3.3 percent year-on-year, up from a contraction of 0.7 percent in the first quarter.
      Inflation has also been picking up all year, rising to a higher-than-expected 3.4 percent in August from 3.0 percent in July, reflecting rising underlying inflation and higher electricity prices.
      NB forecast headline inflation would average 2.7 percent this year, up from June's forecast of 2.3 percent, but then fall to 1.3 percent in 2019, down from 1.6 percent. In 2020 inflation is seen averaging 1.4 percent and then 1.8 percent in 2021.
      In March Norway's government lowered its inflation target to 2.0 percent from the 2.5 percent target that had been in place for 17 years, giving Norway the same inflation target as in most other developed economies.

     Norges Bank released the following press release:

"The upturn in the Norwegian economy continues. Spare capacity is gradually diminishing, and capacity utilisation now appears to be close to a normal level. Underlying inflation is close to the 2 percent inflation target.

Overall, the outlook and the balance of risks imply a gradual interest rate increase in the years ahead. If the key policy rate is kept at the current level for too long, price and wage inflation may accelerate and financial imbalances build up further. That would increase the risk of a sharp economic downturn further out. Uncertainty surrounding the effects of higher interest rates suggests a cautious approach to interest rate setting.
The interest rate outlook is little changed from the June 2018 Monetary Policy Report. With a gradual interest rate increase, inflation is projected to be close to the target some years ahead, at the same time as unemployment remains low.
"The Executive Board's current assessment of the outlook and balance of risks suggests that the key policy rate will most likely be increased further in 2019 Q1", says Governor Øystein Olsen."


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