MNI INTERVIEW: Norges Could Move To Larger Hikes - Governor

Norway’s central bank could re-accelerate its pace of rate hikes if necessary as it contends with inflation and wages which are rising too quickly and a weak exchange rate, Governor Ida Wolden Bache told MNI.

Speaking after Norges Bank announced a well-flagged 25-basis-point increase in its policy rate to 3.25%, and signalled that it was likely to hike again in June, Wolden Bache declined to exclude the possibility of larger tightening moves in future, with the policy rate set to stay above neutral at contractionary or restrictive levels for some time.

"We are not ruling out anything for the interest rate going forward, it will always be based on our assessment of the outlook," she said in an interview.

"We have not yet seen the full effects of the tightening that we have behind us, and we are now in contractionary territory, which is part of the reason for our gradual moves, but we cannot exclude the possibility of larger hikes if the outlook indicates that that is necessary," she added.

The Bank’s most recent assessment is that the real neutral money market rate is likely towards the upper end of a range between -0.5% and 0.5%, which would work out to somewhere below 3% and probably closer to 2.5% in nominal terms, based on forward-looking market measures of inflation.

While Norges Bank was the first major central bank to begin tightening, it is unlikely to be the first to stop, with the Federal Reserve already pointing to a possible pause and the governor stressing the persistence of Norwegian price pressures.

"Inflation has been higher than we expected, although since March core inflation has been in line with our forecast. Activity in the Norwegian economy has kept up better than we envisaged, the labour market is still tight and we now see signs that wage growth is on the rise and you add to that the weakening of the exchange rate," she said.

"That forms the basis for our assessment that there is a need for higher interest rates to bring inflation down."

FX PURCHASES

Norges Bank has justified its policy tightening in part with reference to the weakness of the krone, while at the same time announcing only a marginal slowing in its daily foreign exchange purchases, to NOK1.4 billion per day in May. This has sparked commentary from analysts calling for the pace of purchases to be cut, but Wolden Bache stressed that these are not a monetary policy tool.

"The transactions that we conduct in FX markets we do on behalf of the government in order for them to have sufficient currency to make the transfers of petroleum revenues into the petroleum fund. They are not part of monetary policy and they should be seen as a consequence in part of the purchases of Norwegian krone that the petroleum companies make to pay their petroleum taxes," she said. "So that is not part of monetary policy. If we were to stop, or to change, that framework that would mean an FX intervention."

Norges Bank has intervened in FX markets as recently as 2020 during the Covid pandemic but Wolden Bache does not envisage a repeat.

"The interventions that we made in 2020 should be seen in light of the extraordinary market conditions that prevailed at the time. We don't see signs of similar market conditions at the moment," she said.