Norway’s central bank doled out a pre-holiday surprise on Thursday, but not the one borrowers wanted: Its key policy rate was raised by another quarter-point, along with a warning that no interest rate cuts can be expected until as late as next autumn.
Norges Bank’s committee in charge of monetary policy and financial stability made it clear they’re reacting to a high inflation rate and the country’s historically weak currency, the krone. That’s why they decided to raise the policy rate to 4.5 percent, meaning that borrowers will likely start seeing mortgage rates of well over 6 percent or more, and consumer rates even higher. The overnight lending rate will move up to 5.5 percent and the reserve rate to 3.5 percent, effective December 15.
“We see that the economy is cooling down, but inflation is still too high,” claimed Norges Bank Governor Ida Wolden Bache in a prepared statement. Raising the policy rate now, she added, “reduces the risk of inflation remaining high for a long period of time. The policy rate will likely be kept at 4.5 percent for some time ahead.”
The bank is hanging on to an inflation rate goal of just 2 percent, while figures from state statistics bureau SSB (Statistics Norway) this week put it at 5.8 percent in November, and 4.8 percent when higher electricity rates were removed from the calculation. That was somewhat lower than what many economists had expected (4.9 percent, according to news service Bloomberg) but still up from 4 percent in October.
Norges Bank also noted that business costs have “increased considerably over the past few years,” and wages are expected to keep rising. The krone has weakend as well, hovering as high as NOK 11 per US dollar. While that’s good for Norway’s export industries, it’s not good for the inflation rate. All imports become more expensive for Norwegian consumers, setting off a spiral of higher prices and costs.
Now the central bank’s committee charged with setting interest rates thinks 4.5 percent “is likely close to the level required to return inflation to target within a reasonable time horizon.” Norway’s krone strengthened immediately, with a US dollar costing NOK 10.56 by midday instead of NOK 10.91 earlier this week.
The interest rate hike utterly defied expectations of economists, analysts and media commentators in Norway. Newspaper Dagens Næringsliv (DN) had run a headline as late as Tuesday this week, reading: “Now the economists are certain: Interest rates have topped out” at the earlier level of 4.25 percent.” State broadcaster NRK’s commentators were still talking about the prospect of an early Christmas gift for borrowers just moments before the rate hike was announced.
Kari Due-Andreasen, chief economist at Akershus Eiendom, had described the SSB numbers earlier this week as “good news” that “strengthen the chances there won’t be an interest rate rise this week.” Kyrre Knudsen, chief economost at Sparebank 1 SR-Bank, was among many others who agreed, because inflation numbers came in somewhat lower than expected: “All things considered I’m now nearly 100 percent certain of a halt in interest rate increases and still think we can see the first cut in interest rates as early as March of next year, latest before summer.”
Norges Bank dashed those hopes by clearly stating that its forecast “indicates that the policy rate will lie around 4.5 percent until autumn 2024 before gradually moving down.” Citing uncertainty about future developments in the Norwegian economy and inflation, the monetary policy committee “is prepared to raise the policy rate again,” or lower it if there’s any slowdown or decline in the inflation rate.
Bache noted at a press conference following the rate hike announcement that the committee is well aware that higher interest rates can hurt households already facing tighter budgets. “The policy trade-offs are challenging,” she said, but the committe thinks high inflation can hurt households even more: “High and variable inflation imposes substantial costs to society and hits low-income groups and those who can least afford it hardest. An increase in the policy rate now reduces the risk of inflation remaining high for a long period of time.”
The bank’s next policy rate decision is due in late January.