April 14, 2024

Norway Central Bank makes Largest Interest Rate Hike

On Thursday, the central bank in Norway announced a hike in its benchmark interest rate by 50 basis points, which is the largest hike to have been seen since 2002. Moreover, the central bank did not rule out the possibility of hiking the rates even further, as the country tries to get a handle on the soaring inflation.

Bank Exceeds Own Forecast

The sight deposit rate of the Norges Bank was increased from 0.75% to 1.25% by the monetary policy committee, which exceeded the bank’s own forecast for a hike it had made in March. A rate hike to 1% had been forecasted. Ida Wolden Bache, the governor of the central bank, said that the current assessment of the committee regarding the economic outlook and the risks indicates that the rate would probably be increased to 1.5% in August.

The governor said that hiking the interest rates faster right now would help them in getting a better handle on inflation and would require less sharper tightening of the monetary policy down the road. For the rest of the year, the Norges Bank is planning on hiking the interest rate by 25 basis points all of the four policy meetings that remain. However, Bache said that they could also hike it up in large increments. She said that future hikes could be more than 25 basis points, if needed.

Impact And Future Expectations

The crown had been trading at a value of 10.51 against the euro before the announcement of the rate hike. However, by 0925 GMT, the Norwegian currency had risen to 10.46. Future predictions from the central bank clarified that by mid-2023, the interest rate could hit the 3% mark. Previously, the Norges Bank had said that they would hike the interest rate to 2.5% by the end of 2023.

Market analysts said that these changes in forecast highlight just how much stress the central banks are dealing with. However, they said that it was unlikely that the policy rate would be increased by as much as the central bank claims. Analysts believe that the end of 2023 would see the interest rate at 2.5%. This is due to the fact that Norwegian households tend to be extremely sensitive to high rates.

Forecasts Changed

Apart from hiking the interest rate, the Norwegian central bank also made adjustments to its growth forecast for the country’s economy. This does not include gas and oil output. Back in March, the growth forecast had been 4.1%, but it was now reduced to 3.5%. Likewise, the bank also adjusted the core inflation forecasts for this year from 2.5% to 3.2%.

As for the inflation forecast of next year, the central bank changed it from 2.4% that had been predicted three months ago to 3.3% now. The target of the central bank is to keep core inflation at 2% all times. Global central banks are currently grappling with rising prices after the coronavirus pandemic and the Russia-Ukraine war, which has seen rate hikes made globally.

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