Norway raises rate 3rd time and sees another hike in 2019

21st June 2019 Off By binary

By CentralBankNews.info

Norway’s central bank lived up to its past guidance about monetary policy and raised its key rate for the third time since September 2018, bucking the global trend of declining interest rates and slowing economic growth, and said it is likely to raise the rate further later this year.
Norges Bank (NB) raised its policy rate by another 25 basis points to 1.25 percent and has now raised it by 75 basis points during its current tightening cycle as economic growth remains solid, capacity utilization is above normal and underlying inflation is a bit above the bank’s target.
“Our current assessment of the outlook and balance or risks suggest that the policy rate will most likely be increased further in the course of 2019,” NB Governor Oyestein Olsen said.
However, the central bank’s board is also aware of the possibility of a further escalations of global trade tensions, which could spill over to the country’s economy and lead to lower oil prices.
“Uncertainty surrounding the effects of monetary policy suggest a cautious approach to interest rate setting,” Olsen said.
Today’s rate hike was well-telegraphed by NB in May and thus widely expected by analysts but the Norwegian krone still rose 1.3 percent to 8.55 per U.S. dollar and is now 1.7 percent up this year as it reverses some of its weakness during 2018 when the dollar rose across the board.
      Norway’s oil-dependent economy has been booming since 2016 and in September 2018 the central bank raised its rate for the first time in over 7 years to rein in inflation. 
      The second rate hike following in March this year and NB forecast that it was likely to raise the rate again in the next 6 months to curb inflation from faster-than-expected economic growth and a weak exchange rate of the krone.
       In May NB confirmed it was on track to raise the rate in June and earlier this moth a central bank survey showed that Norwegian companies had boosted their output at the fastest pace since 2012, cementing expectations the rate would be raised today.
      NB still considers its monetary policy stance to be accommodative and kept its forecast for the policy rate in coming years unchanged from March, adding the rate path would be adjusted in response to a change in economic prospects.
      This year the policy rate is seen averaging 1.1 percent, then rising to 1.6 percent in 2020, and 1.7 percent in 2021 and 2022.
      Despite the softening in global growth, Norway’s economy has expanded at a slightly faster pace than the central bank easier projected and tighter labor market conditions suggest higher wages.
      Norway’s gross domestic product grew an annual 2.5 percent in the first quarter of this year, up from 1.9 percent in the previous quarter, 
      In its second monetary policy report of 2019, NB lowered its 2019 growth forecast for the mainland to 2.6 percent from 2.7 percent, steady from 2018’s growth of 2.6 percent.
     “There are prospects that the upswing will continue into 2020, owing in part to higher activity in oil services,” NB said, adding further out the decline in investment was likely to dampen growth.

      For 2020 growth is seen easing to 1.9 percent, up from the March forecast of 2.0 percent, and then slowing further to 1.2 percent in 2021 and 1.2 percent in 2022.

Inflation in Norway picked up through 2018, partly due to higher electricity prices and wages, but this year prices have edged lower but largely as the central bank had expected.
In May Norway’s headline inflation rate eased to a 2019-low of 2.5 percent while the core rate, which excludes taxes and energy products, dropped to 2.3 percent from 2.6 percent in April. Both measures, however, remain above NB’s target of 2.0 percent.
NB forecast consumer price inflation of 2.2 percent this year, down fro 2.3 percent, and below 2018’s 2.7 percent. In 2020 inflation is seen easing further to 1.9 percent and then steadying at 2.0 percent in 2021 and 2022.

Norges Bank released the following decision:

“Norges Bank’s Executive Board has decided to raise the policy rate by 0.25 percentage point to 1.25 percent.
Growth in the Norwegian economy is solid, and capacity utilisation is estimated to be somewhat above a normal level. Underlying inflation is a little higher than the inflation target. At the same time, trade tensions are a source of substantial global uncertainty. Uncertainty surrounding the effects of monetary policy suggests a cautious approach to interest rate setting. The overall outlook and balance of risk suggest that the policy rate be increased somewhat further.
The upturn in the Norwegian economy appears to be a little stronger the coming year than projected earlier. On the other hand, there are prospects for weaker external growth and lower foreign interest rates. The policy rate forecast indicates a slightly faster rate rise in the coming year than projected in the March Report, but the policy rate path is little changed further out. With a policy rate in line with the forecast, inflation is projected to remain close to the inflation target in the years ahead, at the same time as unemployment remains low. The policy rate path will be adjusted in response to a change in economic prospects.
“Our current assessment of the outlook and balance of risks suggests that the policy rate will most likely be increased further in the course of 2019”, says Governor Øystein Olsen.”
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