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Norwegian Central Bank: Biggest rate hike in 20 years

Status: 23/06/2022 15:21

The Norwegian central bank is forced to take drastic measures in view of the rapid rise in inflation. Norges Bank has raised interest rates more than it has in 20 years.

In the fight against high inflation rates, the Norwegian central bank has significantly raised the reference rate: it rises by half a percentage point to 1.25 percent. Monetary watchdogs last dared in 2002 such a drastic increase in interest rates. Most economists only expected interest rates to rise by 0.25 percentage points.

The key interest rate is expected to rise to 3.0 percent

Ida Wolden Bache, president of Norges Bank since April, also expressed the prospect of another rate hike in August. The reference rate should therefore be further increased to 1.5%. Further rapid rate hikes are likely to follow. By the summer of 2023, the base rate is expected to be 3.0%.

Ida Wolden Bache would rather turn the interest rate screw faster than too late.

Image: REUTERS

“Expectations of a prolonged period of high inflation suggest that interest rates will rise faster than previous forecasts,” said Wolden Bache. Faster rate hikes will now avoid the risk of persistently high inflation and the need for further tightening thereafter.

The Norwegian krone, which has been under downward pressure since April due to low market confidence and is not expected to reflect fundamental conditions according to the central bank, gives Norges Bank additional leeway for a quicker approach, he points out. Antje Praefcke, foreign exchange expert at Commerzbank.

Norges Bank is an interest rate pioneer

The Scandinavian industrial country had already ended its zero interest rate policy in September 2021, and by that time it had raised the benchmark interest rate by a quarter of a point to 0.25%. With this change of course, Norges Bank has taken a pioneering role among central banks.

It was the first central bank among major economies to raise interest rates since the outbreak of the coronavirus pandemic. All other major central banks, including the US Federal Reserve, were still reluctant to initiate the turnaround in interest rates at this point.

A mistake, as it turned out in the meantime. The Fed has therefore had to slow down very recently. It has long since caught up with Norges Bank and has now even surpassed it: in mid-June, Jerome Powell’s US monetary authorities raised the benchmark interest rate between 1.5 and 1.75 percent. The Swiss central bank has also recently dared to raise interest rates sharply.

Central banks are under pressure from high inflation rates

The background to the trend towards higher key interest rates in major economies is the rapid rise in consumer prices. The inflation rate in Norway rose to 5.7% in May from the previous year. Excluding energy prices, it was 3.4%.

Norges Bank has now raised its inflation forecast: for this year it expects core inflation, which does not take into account fluctuations in energy prices, to rise by 3.2 percent. Previously, he had predicted a 2.5% increase. In 2023, the core inflation rate is expected to reach 3.3%. For comparison: Norges Bank’s inflation target is two percent.

The European Central Bank (ECB) is also aiming for an inflation rate of two per cent in the medium term. The inflation rate in the euro area rose to an average of 8.1 percent in May compared to the same month last year. The ECB announced the first rate hike since 2011 for July. The most important interest rates must therefore be raised by 0.25 percentage points each.

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