MNI NORGES WATCH: Hikes 25 Basis Points, Raises Peak To 4.5%

Norges Bank delivered a well-trailed 25-basis-point rate hike, taking the policy rate to 4.25%, at its September meeting but surprised by stating that it was likely to hike again in December.

Norway's central bank raised its projections accompanying the decision to show the policy rate holding at close to 4.5% through much of 2024 before declining gradually in 2025 and 2026 to reach 3.2% three years out. While analysts were united in anticipating Thursday's 25bp hike many had assumed that Norges Bank would signal a 4.25% peak with only a slim chance of a further hike.

The previous rate projections had shown the policy rate peaking around 4.25% and then declining to 2.88% in three years . The new higher path, with rates steady next year, reflects in part a response to higher-than-expected earnings growth and concern about inflation expectations.

HIGHER WAGE GROWTH

In its Monetary Policy Report, the Bank said wage growth was set to be higher next year than it had previously expected, noting firms' predictions in its own Regional Network survey and that inflation expectations one and two years ahead had drifted upwards. Norges Bank economists raised the forecast for annual wage growth in 2024 to 5.2% from 4.7% and to 4.6% in 2025 from 4.3%.

"The longer inflation remains elevated, the greater the risk of it becoming entrenched," the Bank stated.

Inflation on the target CPI-ATE measure, however, which excludes energy prices and tax changes, was only nudged a little higher, by 0.1 percentage point to 4.7% in 2024 and by 0.1 to 3.4% in 2025. Nevertheless, it was still shown above the 2.0% target three years out, standing at 2.6% in 2026.

With capacity utilisation revised upwards, the labour market expected to remain tight, and the oil sector boosted by higher global prices, policymakers saw enough evidence to justify not just the September hike but another before the end of the year.

Unemployment was forecast to rise from 1.8% to just 2.4% three years ahead with employment edging up by 0.6% percentage point.