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Rising inflation forecast: Norway significantly raises its benchmark interest rate

Increase in inflation forecasts
Norway is significantly raising interest rates

Economists expect a moderate rate hike. But the guardians of the Norwegian crown dare the biggest hike of the past two decades. The reason is high inflation. And the target value for this year has not yet been reached.

Against the backdrop of rising inflation, Norway’s central bank has raised key interest rates more than it has in 20 years. The country’s central bank raised the key rate by 0.50 percentage points to 1.25%, according to Norges Bank. Most economists only expected interest rates to rise by 0.25 percentage points. Monetary watchdogs last dared in 2002 such a steep rise in interest rates. Central bank governor Ida Wolden Bache also announced a further interest rate hike for August. The reference rate should therefore be further increased to 1.5%.

Norwegian krone / Euro 10.48

“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. Monetary authorities have signaled that the benchmark interest rate could rise to three percent by mid-2023. The central bank had previously aimed for a key interest rate of 2.5 percent by the end of 2023.

The central bank also raised its forecast for core inflation, which excludes volatile components of inflation such as energy prices, from 2.5% to 3.2% for this year. For 2023, the central bank now expects an inflation rate of 3.3%. So far, the forecast was 2.4%. Norges Bank’s inflation target is two percent.

Many central banks around the world are struggling with skyrocketing prices, fueled, among other things, by the aftermath of the war in Ukraine. In mid-June, the Federal Reserve raised its policy rate more markedly than in 1994, in anticipation of the highest inflation of the past 40 years. It approved a 0.75 percentage point increase to the new range of 1.50 to 1.75%. Ahead of record inflation, the European Central Bank (ECB) announced the first interest 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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