UPDATED: Ida Wolden Bache made her debut as the new leader of Norway’s central bank on Thursday by announcing a series of gradual interest rate hikes over the next 21 months. All of them will be aimed at keeping inflation under control, with the bank’s policy rate likely to hit 2.5 percent by the end of 2023.
Bache could point to a unanimous decision by the committee at the central bank (Norges Bank) that’s charged with monetary policy and financial stability. The currently four-member committee voted to raise the policy rate from 0.5 percent to 0.75, with Bache adding that another rise looms as soon as in June.
It’s widely expected that the interest rate hikes will be made gradually, though, in quarter-point increments. That suggests seven interest rate increases given the committee’s prediction of a policy rate at 2.5 percent by the end of next year. Bache said at a press conference Thursday morning that the looming increases could be bigger or come more frequently, in accordance with price increases.
“We want to move forward gradually and believe this (a series of small increases over many months) will bring us near our inflation goal,” Bache said. The goal itself is based on an economic outlook for Norway as a whole that’s still strong, with expectations for ongoing growth and low unemployment. Norway’s economy has continued to grow, especially after Corona infection control measures were lifted earlier this year.
Bache (roughly pronounced “BAH-keh”) conceded that the war in Ukraine has created more uncertainty, “but there are still prospects for a continued upswing in the Norwegian economy.” It’s not just oil and gas revenues that have soared on high prices: Norway’s large fishing industry has also been raking in profits this winter, electricity producers are experiencing almost an embarrassment of riches on record-high rates and shortages in products from Ukraine have led to higher prices on them elsewhere. Demand for steel, for example, prompted reports this that even Norway’s mining industry may benefit from demand for steel components no longer available from Ukraine.
There’s also some uncertainty around how Norwegian households will react to higher interest rates, even though they’ll remain relatively low compared to double-digit rates through the 1980s and 1990s. That’s one of the big reasons for gradual increases, to avoid more shocks to household budgets following a winter of record-high electricity rates and fuel prices. Housing prices that also have far exceeded hikes in other areas are now expected to decline through the year, especially as rising interest rates make mortgage payments higher. Wage expectations are also high, with turbulent labour negotiations and possible strikes later this spring.
Norway nonetheless appears set for more growth, with the new rate hikes expected to keep inflation “close to target,” said Bache as she made her first presentation of an interest rate decision since former Norges Bank Governor Øystein Olsen retired at the end of last month.
Bache herself, meanwhile, was identified in Norges Bank’s official publications on Thursday as sentralbanksjef (literally “central bank chief”) and as “governor” in its English translations. The bank clearly opted against using the titles fungerende sentralbanksjef or “acting governor,” even though NATO Secretary General Jens Stoltenberg had been appointed in January to succeed Olsen as the central bank’s new leader later this year.
Bache was widely viewed as the front-runner for the job until Stoltenberg, a former Norwegian prime minister, expressed interest in the post last fall. Both were ultimately “asked to apply” and Stoltenberg won out, but couldn’t take over until his NATO term was to expire on October 1. Bache was then tapped to lead the bank until Stoltenberg could move from Brussels back to Oslo and take over by the end of the year, at which point she’d return to her post as deputy governor.
Then Russian President Vladimir Putin invaded Ukraine, and speculation was running high again this month that Stoltenberg would be asked to once again extend his term as NATO’s boss for another year. On Thursday, Norway’s current prime minister Jonas Gahr Støre, said Norway would support any proposal to that effect at the extraordinary NATO summit in Brussels this week. Stoltenberg ultimately announced himself that he’ll continue as NATO’s secretary general until September 30, 2023 and won’t be returning to Oslo later this year after all.
It all suggested Bache would continue as governor, and that was confirmed later in the day. She had carefully stayed out of local debate around Stoltenberg’s appointment, consistently refusing to comment on what suddenly became a rather dramatic process into the appointment of a new central bank chief. She continued to refuse to answer questions about her own career or future at the bank on Thursday morning, and once again referred questions on the matter to the finance ministry, which holds political responsibility for the central bank. It issued a statement Thursday afternoon that Bache would be offered a six-year contract as central bank chief, which she accepted.
Bache demonstrated on Thursday, meanwhile, the expertise and professionalism that long-time colleagues at the bank and various economists and finance analysts have credited her with for months. Norges Bank even posted a short video on its website (only in Norwegian), in which she explains in clear language to the public what the monetary policy committee had done on Thursday and why. In it, Bache deviated slightly from the financial and economic matters at hand, commenting for example that “Russia’s invasion of Ukraine has led to great destruction and human suffering,” created uncertainty around economic development and “will probably dampen growth internationally.”
Bache noted that “we think the upturn in the Norwegian economy will continue” nonetheless, and that gradually higher interest rates are needed to “stabilize inflation.” Her approach illustrated some refreshing transparency, clarified the reasons for rising interest rates and provided some reassurance in troubled times.
Not only viewers could be impressed: Norway’s currency, the krone, strengthened again after several days of expectations that rates would start going up. It cost nearly NOK 9 to buy one US dollar just a few days ago, despite high oil prices. At midday Thursday, after the interest rate announcement, it only cost NOK 8.60 to buy a dollar.