Norway central bank raises interest rate, may hike again

On Thursday, Norway's central bank, Norges Bank, raised its policy interest rate by 25 basis points to 4.50%, as anticipated by a slight majority of analysts in a Reuters poll. Governor Ida Wolden Bache stated that it may be necessary to maintain the elevated rate for some time to curb inflation, and the committee is prepared to raise the rate further if necessary to bring inflation down to the 2% target within a reasonable time frame.

The Norwegian crown strengthened to 10.76 against the euro following the announcement, from 10.79 before the decision.

The bank had previously increased rates by 25 basis points in May, moving ahead of most analysts' expectations. However, in August, Norges Bank indicated that future monetary policy decisions would depend on economic developments, leaving some uncertainty about the bank's future actions. The committee aims to avoid over-stiffening the economy while recognizing that a slightly tighter monetary policy stance is required to return inflation to the target within a reasonable time horizon, according to the bank's statement on Thursday.

Among 28 economists surveyed in the period of September 17-21, 16 expected Norges Bank to announce a 25 basis-point hike to 4.50% on Thursday, 12 predicted no change, and 7 predicted a hike to 4.50% would occur in the fourth quarter. The majority of the polled economists believed that 4.50% would be the peak borrowing cost.

Core inflation in Norway rose to 3.0% year-on-year in August, slightly below Norges Bank's forecast of 3.3% for the 12-month period but still above the central bank's target. While underlying inflation moderated over the summer and was lower than expected, the inflation outlook for the more distant future does not appear to have changed significantly.

With the new policy rate path, the bank projects inflation to decelerate from next year and reach 2% by 2029. The economy is expected to cool further, with unemployment projected to rise slightly above pre-pandemic levels.