Norway's central bank again left its benchmark interest rate steady and while the resurgence of the COVID-19 virus and stricter containment measures will lead to a slower economic recovery in the near term, it said the likelihood of a wide availability of vaccinations next year will quickly boost demand, raising the prospect of a rate hike earlier than previously forecast.
Norges Bank (NB), which slashed its policy rate three times this year by a total of 150 basis points to 0.0 percent, said its new economic forecast implies a rate hike in the first half of 2022 as compared with its earlier forecast of a rate hike in late 2022.
"The sharp economic downturn and considerable uncertainty surrounding the outlook suggest keeping the policy rate on hold until there are clear signs that economic conditions are normalizing," NB Governor Oeystein Olsen said.
"The policy rate forecast implies a rate at the current level for over a year ahead, followed by a gradual rise from the first half of 2022 as activity approaches a normal level," he said, adding this implies a somewhat faster rate rise than projected in September.
In its December monetary policy report, NB pencilled in an average policy rate of 0.0 percent in 2021, rising to 0.3 percent in 2022, up from September's forecast of 0.2 percent, and 0.8 percent in 2023, up from 0.3 percent.
As many other economies, Norway's economy was hit hard by the pandemic and containment measures and economic activity plunged in the first and second quarters of this year. The central bank slashed its key interest rate twice at unscheduled policy meetings in March and then once in May.
Although several other countries, such as neighboring Sweden and the European Central Bank (ECB), have resorted to negative interest rates and asset purchases to aid their country's recovery, NB always judged the cost of negative rates outweighed the benefits.
In the third quarter of this year Norway's economy rebounded but higher infection rates and new containment measures are now holding back the recovery and consumption, with gross domestic product of Norway's mainland seen contracting 3.5 percent this year, down from 2.4 percent growth in 2019.
Although the arrival of vaccines in coming months should result in a faster pick-up in economic activity than earlier expected, NB cautioned it will take time for output and employment to return to pre-pandemic levels and maintained its forecast for 2021 GDP growth at 3.7 percent.
NB lowered its forecast for domestic demand in 2021 to expand by 3.7 percent as compared with the September forecast of 5.0 percent growth.
But by 2022 demand will bounce back as household consumption rises further, helped by higher house prices, exports pick up steam and investment in its petroleum industry improves.
Norway's mainland economy is seen expanding 3.1 percent in 2022, up from the earlier forecast of 2.9 percent, and then 1.6 percent in 2023, down from 1.9 percent.
Norway's inflation rate fell sharply to 0.7 percent in November from 1.7 percent in October and the stronger exchange rate of the krona - helped by the rise in crude oil prices - will continue to lower import prices and thus inflation.
Headline inflation is seen averaging 1.3 percent this year, then 2.2 percent in 2021, 2.0 percent in 2022 and 1.7 percent in 2023.
Norges Bank issued the following press release:
"Norges Bank’s Monetary Policy and Financial Stability Committee has unanimously decided to keep the policy rate unchanged at zero percent. In the Committee’s current assessment of the outlook and balance of risks, the policy rate will most likely remain at today’s level for some time ahead.
The Covid-19 pandemic has led to a sharp downturn in the Norwegian economy. Activity has picked up since spring, but higher infection rates and stricter containment measures are now holding back the recovery. At the same time, there is positive news about vaccines, and there are prospects that vaccination can begin in the very near future. This may result in a faster pick-up in economic activity than previously projected. Nevertheless, it will probably take time for output and employment to return to pre-pandemic levels. Underlying inflation has declined somewhat, but is still above the target. The krone appreciation since March and prospects for low wage growth suggest that it will moderate further ahead.
Low interest rates are contributing to speeding up the return to more normal output and employment levels. This reduces the risk of unemployment becoming entrenched at a high level. On the other hand, house prices have risen markedly since spring. A long period of low interest rates increases the risk of a build-up of financial imbalances.
“The sharp economic downturn and considerable uncertainty surrounding the outlook suggest keeping the policy rate on hold until there are clear signs that economic conditions are normalising”, says Governor Øystein Olsen.
The policy rate forecast implies a rate at the current level for over a year ahead, followed by a gradual rise from the first half of 2022 as activity approaches a normal level. The forecast implies a somewhat faster rate rise than projected in the September 2020 Monetary Policy Report."
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