Norway’s central bank raised its benchmark interest rate on Thursday, as expected, and said the war in Ukraine has led to "heightened uncertainty" but the Norwegian economy still holds prospects for "a continued upswing."
Norges Bank’s monetary policy committee hiked the sight deposit rate to 0.75% from 0.50%, its third hike since September.
The central bank said it now plans to hike at a faster pace than previously intended to keep a lid on inflation and a rapidly growing economy.
Norges Bank said it "was concerned with the prospect that the war in Ukraine could result in weaker-than-expected global growth amid rising inflation" but also "with the risk of accelerating price and wage inflation as a result of capacity constraints in the economy and persistent global price pressures."
"If there are prospects of persistently high inflation, the policy rate may be raised more quickly," the bank said in a statement.
While the war in Ukraine has led to heightened uncertainty about the economic outlook, prospects still remain for a continued upswing in the Norwegian economy, the central bank said.
"Based on the committee’s current assessment of the outlook and balance of risks, the policy rate will most likely be raised further in June," said Governor Ida Wolden Bache, presenting the bank’s first rate decision since she took the helm.
The central bank predicted the sight deposit rate could rise to 2.5% by the end of 2023, having previously pointed to a rate of 1.75%.
"Higher capacity utilization, rising wage growth and stronger external price impulses will push up inflation ahead," the bank said in its monetary policy report.
Norges Bank said it now plans to make eight 0.25% rate hikes by the end of 2023, including Thursday’s move, three more than the central bank’s previous projection and more than the six hikes anticipated by economists.
Asked whether moves of half a percentage point were possible, Wolden Bache said rates could potentially rise in bigger increments.
"If there is an outlook for more permanent high inflation, rates may rise more than the rate path indicates. In that case, rates could be hiked at intermediate meetings or by more than 25 points," she told a news conference.
Norges Bank normally seeks to change policy only at its four main meetings of the year, but also holds four intermediate ones when rates could be adjusted if necessary.
The Norwegian currency, the crown, weakened slightly to 9.48 against the euro at 10:44 a.m. GMT from 9.47 just before Norges Bank’s announcement, but still traded near its strongest level since late 2018 after rallying in recent weeks.
Bache became governor on March 1 and is due to step down when NATO Secretary-General Jens Stoltenberg takes over "around Dec. 1."
That may change though as Norwegian media reported on Thursday Stoltenberg may stay on at NATO for another year. Bache declined to comment on the reports.
Energy boom
Norway is Western Europe’s largest oil and gas producer, exporting around 4 million barrels of oil equivalent per day, giving energy companies and the state a sharp rise in income after petroleum prices soared in recent months.
"As we have argued, Norway's status as an energy powerhouse means that it is better placed than most to weather the Ukraine war-related disruption, and even stands to benefit," Capital Economics wrote in a note to clients.
The U.S. Federal Reserve (Fed) and the Bank of England (BoE) both raised rates last week, while the European Central Bank (ECB) has accelerated its exit from unconventional stimulus as energy prices soar and the global economy leaves the pandemic behind.
Norway’s economy sharply rebounded last year from the COVID-19 pandemic and Norges Bank in September became one of the first central banks to hike rates since the pandemic began.
The committee highlighted the war in Ukraine and the potential for lower global growth amid rising inflation among the risks it discussed at the meeting.
It also discussed the risks posed by faster price and wage inflation due to capacity constraints.