Inflation forecast raised: Norway raises the key interest rate significantly higher

Inflation forecast raised
Norway is raising interest rates significantly

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

Against the background of rising inflation, the Norwegian central bank has raised key interest rates more than they have in 20 years. The country’s central bank raised the key rate by 0.50 percentage points to 1.25 percent, according to Norges Bank. Most economists had only expected an interest rate hike of 0.25 percentage points. The monetary watchdogs last dared to take such a strong interest rate step in 2002. Central bank governor Ida Wolden Bache also announced a further interest rate hike for August. The key interest rate should then probably be raised further to 1.5 percent.

Norwegian Krone / Euro
Norwegian Krone / Euro 10.49

“Expectations of a prolonged period of high inflation suggest interest rates will rise faster than previous forecasts,” said Wolden Bache. Faster rate hikes now will avoid the risk of persistently high inflation and the need for even more tightening later on. The monetary authorities signaled that the key interest rate could rise to three percent by mid-2023. The central bank had previously targeted 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 inflation components such as energy prices, for this year from 2.5 percent to 3.2 percent. For 2023, the central bank is now expecting an inflation rate of 3.3 percent. So far, the forecast was 2.4 percent. Norges Bank’s inflation target is two percent.

Many central banks around the world are struggling with skyrocketing prices, which are fueled by the consequences of the Ukraine war, among other things. In mid-June, the Federal Reserve raised the key interest rate more sharply than it had since 1994, in view of the highest inflation in more than 40 years. It approved an increase of 0.75 percentage points to the new range of 1.50 to 1.75 percent. In view of record inflation, the European Central Bank (ECB) has announced the first interest rate hike since 2011 for July. The most important interest rates are then to be raised by 0.25 percentage points each.

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