MNI NORGES WATCH: Hikes, Foresees Rates To Stay High-For-Long

The Norges Bank surprised the majority of analysts by hiking 25 basis points to 4.5% at its December meeting, and highlighted the risks of inflation remaining persistently above target while shrugging off recent softer data.

The Norwegian central bank made clear that it now expects to hold the policy rate at 4.5% for a protracted period of time, in the so-called “Table Mountain” approach. Its rate projection showed the first cut coming between the final quarter of 2024 and early 2025 with the policy rate only dipping to 3.9% in 2025 and down to 3.2% in 2026.

The quarterly Monetary Policy Report indicated inflation on the core inflation CPI-ATE measure is set to hold above the 2.0% target throughout the forecast period, coming in at 4.8% in 2024, 3.5% in 2025 and 2.5% in 2026. Norges Bank cut its onshore growth forecasts, with mainland, or non-oil and gas sector, GDP projected to expand by just 0.1% in 2024, down from the previous 0.3%, while overall GDP growth was raised to 0.8%, from 0.4% for 2024 and to 1.2% for 2025 from 1.0%.

ECONOMY COOLING

Policymakers voted unanimously for the hike, choosing to place relatively little weight on the near-term slowdown in onshore activity.

“We see that the economy is cooling down, but inflation is still too high. An increase in the policy rate now reduces the risk of inflation remaining high for a long period of time. The policy rate will likely be kept at 4.5% for some time ahead”, Governor Ida Wolden Bache said.

Norges Bank is predicting a prolonged period of krone softness. On the trade-weighted I-44 index the krone was shown at 119.7 in 2023 and 121.5 in 2024 and then at 120.5 in 2025, with a lower reading indicating appreciation.

Krone weakness has been greater than predicted by interest rate differentials and oil and gas prices.

"A weaker krone leads to higher imported goods inflation and improves Norwegian firms’ cost competitiveness. This stimulates Norwegian net exports and overall activity," Norges Bank said in the MPR. "Increased labour costs, continued high prices for many intermediate goods and the krone depreciation will contribute to keeping inflation elevated.”