Norges Bank's "surprisingly hawkish" comments fan early hike bet

Norway’s central bank may raise its main interest rate as early as this year, well ahead of peers, after economists found hints in its latest statement pointing to a more upbeat assessment of the future.

Photo: Lars Krabbe

Norges Bank, which kept its benchmark deposit rate at zero as expected, said its official stance remains that the first rate hike is likely to come in early 2022. But the bank also signaled that the prospect of bringing the pandemic under control seemed slightly brighter than previously assumed, in part thanks to Norway’s fast rollout of its vaccine program.

The krone rose about 0.4 percent against the euro, and was up 0.7 percent versus the dollar.

Norges Bank’s statement “was surprisingly hawkish, if you read between the lines,” Nordea analysts Dane Cekov and Kjetil Olsen said in a note to clients. Aside from the bank’s assessment of Norway’s vaccine program, the economists also pointed to its “unusual” decision to highlight market expectations, which point to a rate increase in December.

Unlike most of its peers, Norges Bank has steered clear of unconventional measures such as quantitative easing, with much of Norway’s economic stimulus coming via fiscal policy. The government has relied on its USD 1.3 trillion wealth fund more than ever to boost spending, which has helped shield the economy from the coronavirus crisis.

What Bloomberg Economics Says ...

“With house prices on the rise and only a mild downturn from new virus restrictions we believe it’s right to factor in some probability of that first rate hike coming sooner than shown in the rate path.”

-- Johanna Jeansson, Bloomberg economist

Meanwhile, Norway boasts the rich world’s lowest real benchmark interest rate. And although headline inflation is below the 2 percent target, core inflation is well above, at 3 percent. That’s in part why economists are predicting Norges Bank will move ahead with rate hikes sooner than others.

Norway has been less affected by the coronavirus pandemic than many other countries, and Prime Minister Erna Solberg has even been able to ease some restrictions as cases recede. The economy probably exceeded the central bank’s growth estimates for the end of 2020, but the timing of a potential rate increase will ultimately depend on how quickly Norway can complete its vaccination program.

"Owing to the increase in infection rates and stricter containment measures from the beginning of January, the slowdown in the economy may persist somewhat longer than projected in the December Report," Norges Bank said. "On the other hand, vaccination is well under way, and it appears that the vaccination rollout will be somewhat faster than assumed earlier. Vaccination and the winding down of containment measures will boost growth further out in 2021."

Thursday’s announcement by Norges Bank was a so-called interim decision, with no new forecasts and no press conference.

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