Norway’s central bank had little choice but to raise its policy rate once again on Thursday, if by only another quarter-point. Several Norwegian economists and analysts now think it will rise further, possibly to 4 percent by the end of the year, as a means of slowing price growth and boosting the country’s weak currency.
Norges Bank’s monetary policy committee settled on a new policy rate of 3.25 percent, which will now steer all other rates in Norway. With inflation hovering at around 6.5 percent, the last short-lived boost to 3 percent in March was clearly not enough to help bring prices down and the value of the Norwegian krone up.
Norges Bank governor Ida Wolden Bache stressed that the central bank’s most important task is to secure low and stable inflation. The bank’s goal has been an inflation rate of just 2 percent, meaning that the current rate is simply too high.
“High energy prices are an important reason for the high price growth,” Bache said at a press conference after the latest rate hike was announced, “but the prices of other goods and services have also risen quickly.” She and her colleagues want more price stability, calling that “crucial for maintaining a well-functioning economy.” If the price of money is higher, other prices should decline.
The Norwegian economy remains strong but not only is inflation high, the value of its currency has weakened to a point that baffles and concerns economists and analysts. Raising its price by raising interest rates can address those concerns, too, and the krone did strengthen a bit against the US dollar after the rate hike was announced. A dollar cost as much as NOK 10.80 earlier this week. It cost NOK 10.68 early Thursday afternoon, but NOK 10.73 later in the day. The interest rate rise thus didn’t seem to boost the krone by as much as hoped.
More rate hikes loom
The bank’s monetary policy committee said it was “most probable” that rates will rise again in June, citing a need for higher rates to dampen inflation. “If the krone remains weaker than projected or pressures in the economy persist, a higher policy rate than envisaged earlier may be needed,” Bache stated in the bank’s press release.
That disappoints economists like Roger Bjørnstad at Norway’s largest trade union confederation LO. It just won pay raises of more than 5 percent for its members, and higher interest rates can now dampen their effect. Bjørnstad stressed that the wage settlement was aimed at sharing more of Norway’s wealth and shouldn’t be blamed for boosting prices, although they are. Higher rates should also benefit those with savings accounts, as long as banks are better about passing them on not just to loan customers.
Key interest rates levels remain lower in Norway than elsewhere, and Thursday’s widely expected rate hike followed a rise by the US’ central bank to an even higher level of around 5 percent. The European central bank also raised its rate to 3.25 percent on Thursday.
Kjersti Haugland, chief economist at Norway’s biggest commercial bank DNB, wasn’t surprised by the rate hike and called it a “clear hint” that Norges Bank won’t react to an ongoing weak kroner without raising rates. “I’m not exactly losing faith that interest rates will hit 4 percent this autumn,” Haugland told Norwegian Broadcasting (NRK).