Norway’s central bank (Norges Bank) is sticking to its long-term plan to gradually raise interest rates, confirming on Thursday that it’s boosting its policy rate by another quarter-point. The move comes despite renewed uncertainty tied to a fourth wave of Corona infection, but the bank believes Norway’s underlying economy remains strong and needs the financial stability that higher rates can provide.
“There is considerable uncertainty about the evolution of the pandemic and its effects on the economy,” conceded the soon-to-retire leader of Norges Bank, Øystein Olsen. He and the bank’s committee charged with monetary policy and financial stability noted how the number of new confirmed cases of the Corona virus and Covid-related hospitalizations in Norway “have reached a new peak since the onset of the pandemic.”
They further conceded that sharply higher infection rates and new “extensive” containment measures “are expected to dampen economic activity in the near term.” Norwegian newspapers were full once again on Thursday of reports about new rounds of layoffs as many restaurants and hotels close for the next four weeks because of all the restrictions they now face.
Norwegian households and businesses, meanwhile, are reeling from record-high electricity rates. Some businesses that use lots of electricity, for example to keep greenhouses warm during the winter, have been closing because of the losses they’ll face. Several economists had predicted the central bank might delay the otherwise widely expected interest rate hikes, so that consumers wouldn’t get hit with both higher mortgage payments and higher monthly electric bills at the same time. The government has, however, rolled out some rate relief compensation due to begin in January.
Underlying inflation still low
Olsen and the committee acknowledged how higher electricity rates have “elevated” Norway’s consumer price index (CPI), but stressed that the country’s underlying inflation (measuring price growth in most other areas) remains low (less than 2 percent) and thus below the bank’s own inflation target.
The committee thus moved forward with its rate rise, albeit to only 0.5 percent, because of prospects for a quick return to overall economic growth in Norway as soon as the current infection wave and restrictions ease. The value of the Norway’s currency, the krone, quickly rose: One US dollar cost more than NOK 9.1 Thursday morning, before the rate rise was announced. By midday, it cost NOK 8.91.
The committee stressed how unemployment has fallen and capacity utilization is higher than normal, both of which suggest that there also will be more pressure to raise domestic wages and prices. Olsen and the committee also suggested that the policy rate “will most likely be raised in March” as well. Norway’s overnight lending rate was raised to 1.5 percent and commercial banks were expected to quickly announce rate increases of their own.
Rates have been abnormally low, ever since the central bank slashed them down to zero shortly after the pandemic began in the spring of last year. Now the central bank thinks a gradual normalization is in line with the economic recovery that’s been going on for months.
The bank concluded that if there’s “a need for more stringent and protracted containment measures that pull down economic activity through the spring of next year, further rates hikes may be postponed.” That seems unlikely, though, with Norwegians urged to prepare for higher borrowing costs in the year ahead.