MNI INTERVIEW (RPT): Norges To Hike 25Bps A Meeting-Governor

(Repeats article first published on June 23)

Norway’s central bank is heading towards four more 25-basis-point rate increases this year, though a weaker krone could prompt policy makers to consider a faster pace of tightening, Governor Ida Wolden Bache told MNI after Norges Bank upped the tempo of its hikes to 50 basis points at its June meeting.

“The interest rate projection is consistent with sequential 25-basis-points moves at all meetings remaining this year,” Wolden Bache said in an interview. Norges Bank has four meetings still to come in 2022.

“Obviously there is great uncertainty surrounding that forecast and the committee will make a full assessment each meeting to assess the risks on the outlook and to make the decision as appropriate. We can’t exclude the possibility, of course, that we might need to do more but there are also risks on the other side,” she said.

Before today’s 50-basis-point hike, accompanied by the announcement that the next increase was likely at August’s non-forecast round meeting, Norges Bank had delivered 25 basis point rate hikes at the three quarterly forecasts meetings since last September.

The June hike, whose size had divided analysts leading up to the meeting, with forecasts split between 50- and 25-bp moves, prompted immediate speculation that Norges Bank is setting itself for another half-point increase in September. But Wolden Bache’s remarks suggest that it would take an upside surprise to the inflation outlook for this to happen.

KRONE RISK

One potential risk is further weakness in the Norwegian krone, which on its import-weighted I-44 index undershot Norges Bank’s March forecast due to narrowing interest rate differentials with major trading partners and a rise in risk premia.

“In isolation a weaker krone, depending on what causes the depreciation, will affect our inflation forecast and … pull in the direction of higher interest rates,” Wolden Bache said.

Even with a gentle appreciation of the krone, inflation was forecast to overshoot the 2.0% CPI-ATE target throughout the three-year forecast period, only dipping from 3.3% in 2023 to 2.8% in 2025.

GDP growth was expected to come in at 2.5% this year, 1.6% in 2023 and 1.1% in 2024, all cuts from the March forecasts but still showing Norway’s economy to be more robust than many others, as it is expected to be bolstered by renewed investment in oil extraction. Registered unemployment was shown holding within an exceptionally low 1.8% to 2.1% range.

“We have a strong economy at the moment. We expect growth in private consumption to slow going forward as a result of high inflation and high interest rates. At the same time, we expect investment on the continental shelf, petroleum investment, and also investment on the mainland related to the energy transition, to contribute to high activity in the Norwegian economy going forward,” Wolden Bache said.

“We expect that the output gap will remain positive and that over our forecast period unemployment will remain low in the coming years,” she added.

EASING FINANCIAL CONDITIONS

Another idiosyncratic development in Norway was the easing in financial conditions since March as money market premiums shrunk unexpectedly.

“That is related both to cheaper dollar financing but also to higher structural liquidity in the Norwegian banking system so they have come down more quickly than anticipated,” Wolden Bache said.

Norges Bank, though, expects the effect to be fleeting and for premia to move back in line with its previous assumptions.

“Our forecast for the money market premium going forward is the same as in the previous report which is for it to remain close to 35 basis points ... So that doesn’t have a very strong impact,” Wolden Bache said.