MNI STATE OF PLAY: New Restrictions Muddy Norges Bank Hike

A Covid resurgence has this week seen Norway’s government impose a fresh raft of restrictions on the economy, leaving some doubt over whether the Norges Bank will deliver on a near-promised 25 bps hike to 0.50%.

The December meeting will provide a testing ground for whether a central bank previously looking to hike should be swayed by late breaking Covid news. A second hike in three months looked a safe bet when the Norges Bank meets Thursday, with the Monetary Policy and Financial Stability Committee set to deliver their indicated rate increase.

Based on the Committee’s current assessment of the outlook and balance of risks, a second policy rate in December would still be the most likely outcome.

But as news of the restrictions comes with the bank’s current forecast round already well advanced and too near the decision for public commentary from policymakers, markets are left second guessing the reaction of policymakers.

In the September Monetary Policy Report, Norges Bank analysis was that capacity utilisation had spiked above the 2005-21 average, with rising wage growth and a swathe of job vacancies highlighting mounting upside price pressures. The Bank’s December regional network survey showed capacity utilisation rising even higher above its historical average, which would have reinforced the case for a hike – at least until the new Covid variant struck.

The spike in headline inflation to 5.1% in November, far outstripping Norges Bank’s predictions, would have helped to reinforce expectations of a hike.

But now the choice facing policymakers is complicated by the trade intensity of the Norwegian economy, with decision makers having to factor in the likely response of key trading partners to the latest Covid shock when Norway has moved ahead of the pack in reimposing restrictions.

At what could be Governor Oystein Olsen final key policy meeting, the previously near certain rate hike has been thrown into doubt.

However, given the strength of the domestic economy and the desire of policymakers to get away from the zero lower bound on stability and risk-taking concerns, they may well stick to the pre-planned path.