Norwegian Central Bank: Biggest rate hike in 20 years

Status: 06/23/2022 3:21 p.m

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

In the fight against the high rates of inflation, the Norwegian central bank has raised the key interest rate significantly: it rises by half a percentage point to 1.25 percent. The monetary watchdogs last dared to take such a sharp interest rate step in 2002. Most economists had only expected an interest rate hike of 0.25 percentage points.

The key interest rate is to rise to 3.0 percent

Ida Wolden Bache, who has been President of Norges Bank since April, also held out the prospect of another rate hike in August. The key interest rate should then probably be raised further to 1.5 percent. Further rapid rate hikes are likely to follow. By the summer of 2023, the base rate should be 3.0 percent.

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 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 Norwegian krone, which has been under downward pressure since April due to the poor market sentiment and, according to the central bank, should not reflect the fundamental conditions, gives Norges Bank additional leeway for a faster approach, emphasizes Antje Praefcke, foreign exchange expert at Commerzbank.

Norges Bank is an interest rate pioneer

The Scandinavian industrial country already had ended the zero interest rate policy in September 2021 and at that time raised the key interest rate by a quarter point to 0.25 percent. With this change of course, Norges Bank took on a pioneering role among the 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 step on the brakes all the more recently. It has long since drawn level with the Norges Bank, and has now even overtaken it: in mid-June, the US monetary authorities around Jerome Powell screwed it up key interest rate to 1.5 to 1.75 percent. Also the Swiss central bank recently dared to take a big interest rate hike.

Central banks are under pressure from high inflation rates

The background to the trend towards higher key interest rates in the major economies is the rapidly rising consumer prices. The inflation rate in Norway rose to 5.7 percent in May compared to the previous year. Excluding energy prices, it was 3.4 percent.

The 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, she had forecast an increase of 2.5 percent. In 2023, the core inflation rate is expected to reach 3.3 percent. For comparison: Norges Bank’s inflation target is two percent.

The European Central Bank (ECB) is also aiming for an inflation rate of two percent in the medium term. The inflation rate in the euro zone 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 are then to be raised by 0.25 percentage points each.

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