MNI INTERVIEW: Norges Bank Could Still Hike -Wolden Bache

Norges Bank could still hike again during this cycle despite leaving rates unchanged and signalling that policy may stay on hold for the remainder of 2024, Governor Ida Wolden Bache told MNI after its June meeting on Thursday.

While the Bank’s guidance is for the policy rate to stay at 4.5% until the end of the year, despite its forecasts for inflation to remain above target for three years, Wolden Bache said that there has been no decision to follow a "Table Mountain", or “tabletop”, approach of keeping the rate high-for-long rather than a more activist one of hiking and then cutting.

"I would not say that we have sort of decided on the tabletop strategy ... The committee is concerned [that] cutting rates too early could imply that inflation remains above target for too long. On the other hand, we have seen over the past year that the economy has cooled down and a too high interest rate could [create] a larger slowdown in the economy than necessary," she said.

"We are not excluding the possibility that policy rates could need to go higher. For instance, if we see signs of less spare capacity in the economy or the krone should weaken again that could mean that wage inflation would remain higher-for-longer, which could call for an interest rate hike.”

Norges Bank raised the policy rate from 4.25% in December. An increase in joblessness is one factor making it cautious before any additional tightening.

"We have seen unemployment has risen, albeit from a very low level and we do expect it to increase somewhat also in the coming years," Wolden Bache said.

ALTERNATIVE SCENARIOS

The Norges Bank Watch 2024, commissioned by Norges Bank and published earlier this year, suggested a shift to publishing alternative policy rate paths, for example showing the impact on policy of krone depreciation, and Wolden Bache said she was open to the idea, which would be in line with recommendations recently made to the Bank of England by former Federal Reserve Chief Ben Bernanke. (See MNI INTERVIEW: Norges Bank Needs Scenarios For Krone Weakness)

But she stressed that the technical challenges of spelling out detailed alternative scenarios, rather than the single rate path produced in June, are not negligible.

"We ...read the Bernanke Report and others have also made that suggestion, and on occasions we have used alternative scenarios, during Covid. We might do that again at some point," she said.

"We are continuously thinking about how to improve our communication so that could be one tool that we could use more in future. But I would highlight that it is quite complicated to make realistic scenarios … There is never only one variable that changes and the effects of a krone depreciation, say, for the outlook, would depend very much on what was the source, and causes, of that depreciation. It is not trivial. It can be done but it needs to be done with care.”

RISE IN R-STAR

In June's Monetary Policy Report, the central bank raised its estimate of the real neutral interest rate by 50 basis points to an interval between 0 and 1%, up from -0.5% to 0.5% previously, suggesting a nominal policy rate range of 1.7% to 2.7%.

The Governor said, however, that this did not impact June's three-year rate path as they had run ahead of the change in previous Monetary Policy Reports by using the upper end of the previous range, and that they did not allow the estimate of “r-star” to dictate policy.

"It is one indicator that we use as a part of our assessment of where the economy and the interest rate is going, whether monetary policy is contractionary or expansionary, but it is not the only indicator that we use. It is a useful indicator but it will never be a deciding [factor]," she said.

The direct impact of the hike in r-star is evident "if you look several years ahead ... we now believe that the normal range for the rate is higher," she said.