MNI STATE OF PLAY: Norges Bank Signals Likely September Hike

The Norges Bank will likely raise interest rates from as early as its September meeting, looking set to be the first advanced nation nation to tighten monetary policy in the post-pandemic recovery.

Leaving current monetary policy settings unchanged, with the benchmark rate at 0%, the bank's Monetary Policy and Financial Stability Committee's latest "assessment of the outlook and balance of risks" means the rate "will most likely be raised in September," Governor Oystein Olsen said in a statement on Thursday.

The committee also upped the entire rate path, albeit modestly, in its collective projection.

Going in to the June meeting, the committee's guidance was only that it was likely to hike at some point in the second half. Its new rate path suggests that there could be three more 25-basis-point hikes by the end of next year, with the rate at the end of the three-year forecast period now at 1.5% compared to 1.3% previously.

LACK OF INFLATIONARY PRESSURE

The projected rate hikes result in inflation being forecast to undershoot the 2.0% target throughout the three-year period. The target CPI-ATE measure is expected to come in at 1.7% this year, at 1.3% in 2022, 1.4% in 2023 and 1.6% in 2024.

"Krone appreciation since 2020 and prospects for moderate wage growth suggest that inflation in Norway will remain below target in the coming years," the committee said, although the MPR did highlight uncertainty caused by sharp rises in inflation in the U.S. and elsewhere.

In its decision, the committee, whose dual mandate includes financial stability, highlighted concerns over house price inflation and a fall in money market premia that has ensured interest rates facing borrowers are around all-time lows. It said it would be appropriate to return policy to a more normal setting with the output gap set to close next year and activity indicators showing Norway recovering strongly.

The committee said a "long period of low interest rates increases the risk of a build-up of financial imbalances" and noted the rise in house prices since spring 2020, though it added that "house price inflation has recently moderated somewhat."

FOREX RATE

The krone exchange rate on the import-weighted I-44 measure has been broadly unchanged since the March 2021 Monetary Policy Report, having previously appreciated sharply as it reversed losses from the original Covid-19 shock.

Norges Bank's new forecasts, which factors in interest rate differentials, is for further modest krone appreciation ahead, from 104.4 in 2022 to 103.5 in 2024, with a lower reading indicating a stronger krone.