Norway’s central bank (Norges Bank) issued new, ominous warnings of higher inflation and higher interest rates on Thursday. Central bank chief Ida Wolden Bache all but reversed course over the past few months, revealing that it’s now more likely rates will rise instead of fall.
Norwegians had been under the impression that rates would decline this year after remaining at levels higher than in most other countries. There were two quarter-point rate dips in Norway last year, starting in June, and more were expected this year.
Borrowers did get some relief on Thursday when Bache announced that the current policy rate of 4 percent would remain unchanged, at least until the next meeting of the central bank’s committee charged with monetary policy and financial stability.
Then came the bad news: The committee, according to Bache, already thinks “it will likely be necessary to raise the policy rate” at one of its upcoming monetary policy meetings. The main reasons: Higher inflation than expected and all the economic uncertainty around the new war in the Middle East, launched when US President Donald Trump and Israel’s Benjamin Netanyahu started bombing Iran a few weeks ago.
“Uncertainty is greater than normal,” Bache said, because of the war in the Middle East, Bache said. She and the committee noted how it has “led to high volatility in energy and financial markets” and that “oil and gas prices have increased sharply.” Pump prices for diesel fuel in Norway have already topped NOK 30 per liter in some areas, equivalent to around USD 12 per gallon.
Higher energy prices will likely reduce global growth, according to the monetary policy committee, and push up inflation both abroad and in Norway. Inflation was already running higher than Bache and her colleagues had expected, more than a full percentage point higher than the central bank’s 2 percent target, and there also have been “wide swings” in currency exchange rates.
In short, there are so many unknowns that the prospect for lower inflation and lower interest rates is dim. Several Norwegian economists have recently warned of the same. Kjersti Haugland, chief economist at DNB Carnegie, wrote in newspaper Dagens Næringsliv (DN) just before Thursday’s central bank announcement that it “could be more risky to do too little than to do too much” regarding measures tied to controlling inflation.
Haugland’s counterpart at Handelsbanken Capital Markets, Marius Gonsholt Hov, had written the day before that interest rates “should go up” because energy prices are still much higher than before Trump launched the war on Iran. Tor Vollaløkken of Exante Data had predicted that any interest rate cut had become unlikely and that the outlook should signal one or two rate hikes this year, “if the central bank dares to make such a dramatic turnaround.”
Norges Bank did just that, even predicting that interest rates may be back up at 4.5 percent by the end of the year. Finance Minister Jens Stoltenberg predicted earlier this week that “we must prepare ourselves” for more price growth. Speaking at a finance organization’s meeting in Oslo, the former secretary general of NATO claimed that “we have not lived in a more dangerous world than we live in now,” when sudden outbursts from Trump can have great consequences.
One of Norway’s veteran economists, professor Knut Anton Mork, believes the US has already gone into a recession amidst “a perfect storm” involving higher prices and interest rates, Trump’s tariff threats, a “bubble” around artificial intelligence and its financing.
“And then (a war in) the Persian Gulf on top of all that can be the spark to make everything explode,” the 79-year-old Mork told DN. “I think the markets have only partially registered the huge problems (the war) will create for supply chains all over the world. I can only say that there’s a lot that can go wrong when we have such an unpredictable world.”
Norges Bank’s Bache seemed almost apologetic about her warnings of higher interest rates. “I know that many people have been waiting for a further reduction in the policy rate,” she said after Thursday’s announcement. “As recently as in January we expected the policy rate to be reduced this year. But we cannot make any promises about the policy rate, and certainly not in today’s world of abrupt shifts in the outlook.” She remains keen, though, to bring the inflation rate in Norway back down to 2 percent.
NewsinEnglish.no/Nina Berglund
