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Sunday, May 19, 2024

Rate hike aimed at curbing inflation

Norway’s central bank stepped up its battle against inflation on Thursday, raising interest rates once again by a half- instead of a quarter-point. It’s the biggest single rate hike in years, and briefly boosted Norway’s historically weak currency, the krone.

The value of Norway’s weak currency, the krone, briefly rose after the interest rate announcement but not by much. At 10am, it cost NOK 10.76 to buy one US dollar. At 11am, an hour after Norges Bank raised interest rates by a half-point, a dollar cost NOK 10.54. By the end of the day, the gain had evaporated. PHOTO: Norges Bank

“If we don’t raise the policy rate (from 3.25- to 3.75 percent), prices and wages could continue to rise rapidly and inflation could become entrenched,” warned Ida Wolden Bache, governor of Norges Bank, when the new rate hike was announced. “It may then become more costly to bring inflation down again.”

Bache also made it clear that Norway’s policy rate “will most likely be raised further in August.” That’s because Norway’s current inflation rate jumped to 6.7percent in May, more than triple the central bank’s goal of just 2 percent, and prices keep rising.

Hard-won wage growth, meanwhile, is expected to settle at around 5.5 percent this year, after employers went along with labour organizations’ demands for some “real” pay increases to offset inflation. Workers may end up lagging behind once again, however, because of how prices for food, housing and just about everything else keep rising even more.

Inflation ‘markedly above target’
Norges Bank’s Monetary Policy and Financial Stability Committee noted how inflation “is markedly above target” and wage growth is “set to be higher than in 2022,” even though it’s lower than price growth. “Activity remains high amid continued tightness in the labour market,” the committee noted in its explanation for the rate rise, “but pressures on the Norwegian economy are easing.”

Central bank chief Ida Wolden Bache had to raise interest rates once again on Thursday. PHOTO: Norges Bank

The half-point rate rise was thus “needed to bring inflation down to target,” according to the committee, which also noted how “international interest rates have risen more than anticipated.” That acknowledged how interest rates in Norway have remained lower than than those in the US, the EU and many other countries around the world.

Economists have cited Norway’s relatively low rates as one of many reasons for the historic weakness of the Norwegian krone. They’ve been debating for months over why a US dollar, for example, has been costing well over NOK 10 for months now (even over NOK 11 in recent weeks) when a dollar used to cost just NOK 6-7. That level all but disappeared when oil prices first fell nine years ago, despite Norway’s consistently strong economy and ongoing profits from oil and gas.

The weak krone has also been blamed on Norway’s unpopular Labour-Center government, which has been called “weak” and even “rotten” by some investors complaining about its large and “risky” tax increases. Tycoon Kjell Inge Røkke set off a wave of “tax refugees” moving to Switzerland during the past year, to avoid Norway’s so-called “fortune tax” on net worth that comes on top of all the other taxes that also have been rising.

Øystein Dørum, chief economist for Norway’s national employers organization NHO, wrote this week that there are several reasons for Norway’s weak krone, not least that there have been more sellers than buyers, lower prices for Norway’s oil, climate challenges facing Norway’s biggest industries and expenses tied to the shift to a greener economy. Dørum also noted that the krone is a small and not very liquid currency, and that Norway has gone from having higher interest rates than its trading partners to having lower rates. That’s made the krone less attractive.

“If the krone turns out to be weaker than assumed,” wrote the central bank’s committee, “or pressures on the economy persist, a higher-than-projected policy rate may be needed to bring inflation down towards the target.” If the effects of previous rate hikes finally emerge, though, and inflation declines or the economy slows down more than it already has, the policy rate may not need further adjustment.

The bank’s rate forecast has nonetheless been “revised up” since last spring, and now indicates a rise to 4.25 percent during the autumn. The next rate decision is due in August. Berglund



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