Interest rates

Rise in interest rates in Norway | Will Norges Bank maintain its hiking rates?

Norges Bank to continue raising rates as inflation hits 30+ year highs – Photo: Shutterstock; Alexandrestock23

Central Bank of Norway Norges Bank pushed for a faster-than-expected rate hike in August.

Instead of sticking to its plan to hike rates by 25 basis points (bps), the bank opted to double that amount to catch the surge in inflation. With inflation still above its 2% target this year, will Norway’s interest rate hike continue?

What is Norges Bank?

Norges Bank is the central bank of Norway. It was founded in 1816, two years after the country separated from Denmark and united with Sweden.

But it was not until 2001, with the publication of new monetary policy regulations by the Council of State, that the bank was given responsibility for setting key interest rates to maintain inflation. weak and stable. The target was set at 2.5%, but was reduced to 2%, based on the Royal Decree of 2019.

There are three decision-making bodies at Norges Bank: the Board of Directors, the Monetary Policy and Financial Stability Committee and the Supervisory Board.

The Monetary Policy and Financial Stability Committee is responsible for implementing policy instruments, such as interest rates, to achieve monetary policy objectives. In Norway, the policy rate is the interest rate applied to banks’ sight deposits with Norges Bank up to a certain quota. The committee sets the key interest rate, also known as the demand deposit rate, eight times a year.

Other functions of the central bank of Norway include managing the country’s foreign exchange reserves and the Government Pension Fund Global (GPFG) on behalf of the government. The GPFG is the largest sovereign wealth fund in the world, with total assets of $1.268 billion, according to the SWF Institute.

Historical Norwegian interest rates

Norges Bank kept its key rate at 0% from May 2020 to August 2021 as the country’s economy weakened amid the Covid-19 pandemic. On September 23, 2021, the central bank of Norway raised the policy rate by 25 basis points (bp) to 0.25% as it began the gradual normalization of its rate.

The bank noted a recovery in the economy as it gradually reopened. While the inflation rate was still low at the time, increased activity with the removal of Covid-19 restrictions and rising wage growth are expected to push inflation towards the 2 target. %, Norges Bank said in a statement.

It kept the policy rate at 0.25% until December 2021, when Norges Bank raised it to 0.50%. The bank suspended rate hikes in January and kept the rate unchanged until March 2022 due to uncertainty over the impact of the Omicron variant, which sparked new virus outbreaks at the time.

The bank raised the rate by 25 basis points to 0.75% in March 2022 as Russia’s invasion of Ukraine increased uncertainty about Norway’s economic outlook. Price and wage inflation has been higher than expected, and rising wages and inflation of imported goods are expected to push up underlying prices in the near future.

For the next three months until June 2022, Norges Bank kept the policy rate unchanged at 0.75%. However, the bank revised its key rate forecast upwards and indicated that it would continue to tighten its policy to 2.5% in 2023.

In June, the bank got even more hawkish, raising the rate by 50 basis points to 1.25%. Soaring energy prices pushed annual consumer price index (CPI) inflation to 5.4% in May, more than doubling the target.

Interest rates in Norway, 2017 - 2022

Interest rate hike in Norway in August

Although at first Norges Bank indicated that it would only hike 25 basis points in August, it changed direction and opted for an interest rate hike of 50 basis points, bringing the policy rate at 1.75%. Norges Bank Governor Ida Wolden Bache explained the faster-than-expected rise with high inflation, which put pressure on the country’s economy.

“Policymakers have had to choose between sticking to their previous guidance or changing course and acting more forcefully on the basis of the latest data – a similar conundrum that the ECB (European Central Bank) faced a while ago. weeks away,” said James Smith, ING’s developed markets economist.

The European Central Bank (ECB) raised its key rate to 0.50% in July, ending the zero interest rate regime in place since 2016.

Smith added that “in practice, officials concluded that front-loading rides in this environment made more sense.”

Soaring inflation rate keeps Norges Bank on guard

Norway’s inflation rate rose sharply from 3.2% in January to a peak of 6.8% in July, and fell in August, mainly due to high energy prices. Natural gas prices in Europe hit record highs, mainly because Russia continued to cut supplies in retaliation for sanctions over its invasion of Ukraine.

Norway inflation rate, 2021 - 2022

In June, Norges Bank predicted inflation would hit 4.6% in 2022, before slowing to 2.7% in 2025.

“Energy inflation has plateaued in recent months, but the country’s low hydro reserves and poor connectivity mean prices are likely to rise over the winter,” the economists said.

ING Group expects the inflation rate to average 5.6% in 2022, to reach 4.3% in 2023 and 2.5% in 2024.

Meanwhile, inflation projections from Fitch Ratings Norway saw the CPI peak in 2022 at around 4.6% and decline in coming years, but could remain above the inflation target of 2 % until 2024.

The energy sector protects the Norwegian economy

While rising energy prices triggered inflation, Norway also received higher revenues from oil and gas exports.

According to Fitch Ratings, Norway’s GDP is expected to grow by 3.4% in 2022, thanks to resilient domestic demand and strong exports from the offshore energy sector, which accounts for 21% of Norway’s economy. Economic growth is expected to moderate to 1.6% on average in 2023 and 20254.

“The Norwegian economy is in a strong cyclical position in mid-2022… A large energy sector protects Norway from the direct negative effects of soaring European energy prices amid the war in Ukraine and sanctions against Russia,” analysts at Fitch Ratings said.

Oxford Economics expected Norway’s GDP growth to average 3% in 2022, slowing to 2.3% in 2023.

Meanwhile, ING’s forecast showed Norway’s economy could grow 3.1% in 2022, decline to 1.3% in 2023 and recover slightly to 1.6% in 2024.

The labor market will remain tight

Data from Statistics Norway showed that the unemployment rate remained low at 3.2% of the total labor force in June due to significant labor shortages. The tight labor market helped fuel inflation due to higher-than-expected wage growth

“As the competition for labor intensifies, employers are ready to do more to recruit people with the right skills. We expect wage growth to continue to pick up. New data also indicates that wage growth may have been a bit higher earlier this year than we had assumed,” Norges Bank Governor Ida Wolden Bache said in her speech. august.

The central bank revised up its wage growth forecast to 3.9% from 3.7% in March. The bank’s survey showed wage growth could reach 4.5% in 2023.

Norwegian interest rate outlook for 2022 and beyond

With inflation expected to remain elevated and the tight labor market persisting, what is the Norwegian central bank’s interest rate forecast?

Norges Bank has indicated that it could raise the key rate to around 3% by summer 2023, before the monetary easing.

As of September 13, ING expected Norges Bank to raise its key rate to 2.75% by the fourth quarter of 2022 and to 3% by the first quarter of 2023. It expected this Norway’s interest rate hike stops and stays at 3%. until the first quarter of 2024, before lowering it to 2.50% in the last quarter of 2024.

Oxford Economics has predicted that the Norwegian interest rate could average 2.75% in 2022, rising to 3% in 2023. The economic research firm expects the interest rate of the Norwegian central bank drops to 2.50% in 2024 and 2% in 2025.

“The pace at which Norges Bank has changed course in recent months suggests that it is increasingly keen to defend its inflation-fighting credentials. by the second half of 2023, at which time inflation should show significant signs of slowing,” Oxford Economics said in the note released Aug. 23.

Fitch Ratings predicts Norway’s central bank will continue to raise its key rate until it hits 3% in 2023.

Trade economy expects Norway’s central bank rate to reach 2.25% by the end of this quarter. For the long term, the economic data provider predicted that Norges Bank would raise the rate to around 3.25% in 2023 and 2.75% in 2024.

Remember that analysts’ predictions on Norwegian interest rates can be wrong and have been inaccurate in the past. You should always do your own research before trading, consulting the latest Norwegian economic news, technical and fundamental analysis and a wide range of analyst commentary.

Note that past performance does not guarantee future returns. And never trade money you can’t afford to lose.

FAQs

Are interest rates rising in Norway?

Norges Bank has been steadily increasing its key rate since December 2021 with a break in January and May.

What is the current interest rate in Norway?

As of September 12, the current policy rate in Norway was 1.75% and was due to be raised by 50 basis points (bps) at the September 22 meeting.

What is the mortgage rate in Norway?

As of September 12, the average interest rate on residential mortgages was around 2.2% in Norway, a rate that Norges Bank expected to increase to 4.3%.

Further reading:

Norwegian krone banknotes
Stock photo of a gas pipeline running through farmland in Norway