The executive board of Norway’s central bank, Norges Bank, ignored warnings from labour leaders and exporters and opted to raise the country’s key policy rate by a quarter-point on Thursday. The board claimed that Norway’s economy was on a “firm footing” and the rate hike was aimed at heading off inflation even though it remains low.
The key policy rate now stands at 2.25 percent after the first interest rate adjustment since last May. While labour leader Roar Flåthen had urged against an increase, and exporters worried about seeing their goods priced out of global markets, many financial analysts had supported a rate hike to maintain financial stability.
Øystein Olsen, new head of the central bank, noted that “several other central banks have raised their key rates” recently. “The consideration of stabilizing activity and inflation somewhat further ahead suggests that the key policy rate should be raised,” Olsen said.
He conceded that inflation remains low, suggesting the key policy rate should be kept low as well. “On the other hand, capacity utilization in the economy is rising,” he said. “There are prospects that inflation will pick up over the year ahead.”
That in turn suggests the key policy rates “should be raised gradually towards a more normal level,” leading the board to conclude that Norway’s key policy rate should be boosted now.
Exporters are worried because higher interest rates can further boost the strength of Norway’s already strong currency, the krone, and lead to even more unfavourable exchange rates. The US dollar, for example, is very weak compared to the krone as is the Euro, making Norwegian goods and services even more expensive.
The recent rate hikes in countries like Sweden and in the EU, though, “give a bit of room for Norway to raise its rates,” Professor Ragnar Torvik told newspaper Dagens Næringsliv (DN) earlier this week. He and several other economists and analysts on DN’s interest rate panel had recommended the rate hike that Olsen and his fellow board members implemented on Thursday.