MNI INTERVIEW: Norges Bank Head Says Could Up Tempo Of Hikes

Norges Bank could accelerate its pace of monetary tightening, increasing the policy rate at a higher tempo than 25 basis points a quarter or even hiking by more than 25 points in one go, Governor Ida Wolden Bache told MNI.

Speaking after its March meeting, at which Norges increased its policy rate by 25 basis points and pointed to another increase coming in June, Wolden Bache stressed the uncertainty surrounding the Bank’s forecasts, which showed inflation a little above its 2.0% target throughout its three-year horizon as the economy operates above its potential capacity.

“The war in Ukraine caused significant uncertainty on how the outlook for the global economy will affect the Norwegian economy, but the Committee has been concerned with the risk that inflation might rise faster than we currently project,” she said. “That could indicate the need for faster rate hikes.”

Norges Bank’s latest projections show the policy rate moving up steadily from its current 0.75% to 2.5% by the end of 2023 and staying there before dipping to 2.4% in 2025.

UNCERTAINTY

“We do emphasise the uncertainty about the general economic outlook and the uncertainty about how households will respond to higher interest rates and that is the case for moving gradually with interest rate hikes,” Wolden Bache said.

She noted that Norges Bank had signalled policy normalisation for a long time, making it the most predictable of central banks, but “if the inflation outlook warrants it, if there is cause to believe that that will be more persistent than we now envisage, then we can move faster.”

Norges Bank, which began hiking rates earlier than other advanced economy central banks, usually only adjusts rates by at most once a quarter, allowing it to explain its decisions in light of changes to its quarterly forecasts. A more rapid pace would mean moving in secondary meetings unaccompanied by a full forecast round.

“The current interest rate forecast is consistent with a quarter-percentage-point rise every quarter. A faster interest rate rise, if that is warranted … could imply an interest rate hike that is greater than a quarter of a percentage point or that we change the interest rate at meetings where we don’t have a monetary policy (round),” she said.

OIL BOOSTS KRONE

One downside effect on imported inflation has come from the krone, which has strengthened since the December forecast round. But its next moves are tricky to predict and would typically reflect a range of factors including oil price changes, interest rate differentials and the outlook for Norway’s export markets.

Wolden Bache said that while the krone appreciation appeared to be “related to the increase in oil prices, on the other hand the uncertainty that is affecting financial markets due to the … war in Ukraine pulls in the other direction. Those forces play a part in our forecast, so we predict a fairly stable exchange rate.”

Norges Bank expects uncertainty around oil prices to diminish over time and for crude prices to fall and interest rate differentials to decrease, with offsetting effects on the currency.

Another downward effect on Norway’s policy rate comes from krone money market premia, which have increased by more than Norges Bank assumed, resulting in more de facto tightening from earlier rate hikes than expected.

“The money market premium has risen since December, we relate that to both … structural liquidity in the Norwegian banking system … but also to the higher cost of dollar funding,” Wolden Bache said, adding that these effects are expected to decline going forward.