Norway holds rate but pulls forward hike to H2 2021

     Norway's central bank left its monetary policy rate steady, as widely expected, but pulled forward a rate hike for the second time in three months to the second half of this year from the first half of 2022 as inflation is now seen higher than previously forecast.
     The Norske Bank (NB), which slashed its policy rate three times last year by a total of 1.50 percentage points to 0.0 percent, said the overall outlook and balance of risks imply a continued expansionary monetary policy but when there are clear signs economic conditions are normalizing, it will be appropriate to raise the policy rate gradually from today's level.
     "The policy rate forecast implies a gradual rise from the latter half of 2021," NB Governor Oeystein Olsen said, adding this implies a "somewhat" faster rate rise than forecast in the December monetary policy report when the rate was forecast to be raised in the first half of 2022, up from an earlier forecast of late 2022.

     The March policy report forecast the policy rate will average 0.0 percent in 2021 but then rise to 0.5 percent in 2022, up from December's forecast of 0.3 percent, and then rise further to 1.0 percent in 2023, up from 0.8 percent. 

     For 2024 the policy rate is seen averaging 1.3 percent.

     Despite the lingering uncertainty around the COVID-19 pandemic and the impact of vaccinations on the economic recovery, NB expects economic activity to approach a normal level earlier than previously expected, with the economy expanding 3.8 percent this year, up from a contraction of 1.3 percent in 2020.

     Although this is below December's forecast of 4.0 percent growth due the impact of continued containment measures, the economy is seen growing 3.4 percent in 2022, up from December's forecast of 3.1 percent before slowing to 1.2 percent in 2023.

     Inflation in Norway has risen sharply in the last three months to a higher-than-expected 3.3 percent in February from 2.5 percent in January but NB said the rise in the krone's exchange rate and moderate wage growth suggest inflation will ease.

     Headline inflation is now seen averaging 2.8 percent this year, up from a previous forecast of 2.2 percent, but then decelerating to 1.1 percent in 2022 and 1.5 percent in 2023, below the bank's target of inflation close to 2.0 percent over time.

     Reflecting the rise in crude oil prices, Norway's krone has firmed steadily since tumbling in March last year and was trading at 8.52 to the U.S. dollar today, little changed this year but up 38 percent since a low hit on March 23, 2020 and up 3.5 percent since the start of 2020.

       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 be raised in the latter half of 2021.

The Covid-19 pandemic has led to a sharp downturn in the Norwegian economy. Activity has picked up since spring 2020, but the recovery is being held back by higher infection rates and strict containment measures. On the other hand, information from the health authorities suggests that a large portion of the adult population in Norway will be vaccinated before the end of summer. At the same time, global economic developments are better than expected. This may result in a faster pick-up in economic activity than previously projected. Nevertheless, it will probably take time for employment and unemployment to return to pre-pandemic levels. Underlying inflation is still above the target, but has moderated in recent months.

The Committee placed weight on the contribution of low interest rates to speeding up the return to more normal output and employment levels. This reduces the risk of unemployment becoming entrenched at a high level. There are some signs of higher cost growth both globally and in Norway, but the krone appreciation and prospects for moderate wage growth suggest that inflation will move down ahead. The Committee also placed weight on the marked rise in house prices since spring 2020. A long period of low interest rates increases the risk of a build-up of financial imbalances.

“The overall outlook and balance of risks imply a continued expansionary monetary policy stance. When there are clear signs that economic conditions are normalising, it will again be appropriate to raise the policy rate gradually from today’s level,” says Governor Øystein Olsen.

There is substantial uncertainty surrounding the economic recovery ahead, but there are prospects that economic activity will approach a normal level earlier than projected in the December 2020 Monetary Policy Report. The policy rate forecast implies a gradual rise from the latter half of 2021. This implies a somewhat faster rate rise than projected in December."

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