MNI REVIEW: Norges Bank Sees Three Rate Hikes From H1 2022

Norges Bank left its key policy rate on hold at zero percent on Thursday but projected that its first hike would come sooner, perhaps as early as the first half of 2022 and that the policy rate would then rise markedly more rapidly than it had previously projected.

The Monetary Policy and Finanacial Stability Committee's collective rate path in the December Monetary Policy Report (MPR) assumed three rather than two hikes over the three-year forecast horizon. The policy rate was shown rising from 0.3% in 2022 to 0.8% in 2023, with the 0.8% level 0.3 percentage point higher than forecast in the previous MPR.

Guidance remained unchanged with Governor Oystein Olsen saying that "the outlook suggests keeping the policy rate on hold until there are clear signs that economic conditions are normalising."

Norges Bank has put neither quantitative easing nor negative rates in its policy toolbox and it said in the MPR that "the Committee does not envisage making further policy rate cuts."

TAKE-OFF 2022

The rate forecast assumes a strengthening rebound as 2021 progresses and activity approaching normal in 2022 when policy tightening begins.

Unemployment is expected to decline, but to remain above pre-pandemic levels, with inflation falling below the 2.0% target in 2022 and staying there in 2023.

Detailed forecasts showed GDP rising 4.0% in 2021, up from 3.8% in the previous forecast, and rising 3.1% in 2022, with mainland, or non-oil, GDP growth of 3.7% in 2021, unchanged from the previous forecast, and 3.1% in 2022, 0.4 percentage point above the prior prediction.

CPI-ATE, the target inflation measure, was shown falling from 3.0% in 2020 to 2.1% in 2021 and down to 1.4% in 2022 before edging up to 1.5% in 2023.

The trade-weighted krone index, the I-44, is seen weakening throughout the forecast period as the currency strengthens, moving from 115.0 in 2020 to 111.8 in 2021 and on to 110.7 in 2023. A lower reading indicates appreciation.

Norges Bank noted the recent strengthening of the krone and expected the process to continue, reflecting oil prices, global demand and stabilised financial markets.