MNI STATE OF PLAY: Norges Bank Holds But Cites  Upside Risks

Norway’s central bank Thursday reaffirmed guidance that its next hike was likely in March and prepared the ground for a possible increase in its projected rate path, citing upside risks from lower-than-expected unemployment and elevated global inflation.

Commentary accompanying the decision by Norges Bank’s Monetary Policy and Financial Stability Committee to hold rates as expected in January suggested that inflation pressures are higher than assumed in its December forecast, which was compatible with three hikes this year at most. Some analysts already expect it to increase rates four times in 2022, and they may now find confirmation in the next collective rates projection in March, when Norges indicated it is likely to raise the policy rate another 25 basis points to 0.75%

Despite the cushioning effect on surging energy prices from government support measures, the underlying inflation measure targeted by Norges jumped to 1.8% in December from 1.3% in November, where the Committee had previously assumed it would stay.

PRICE PRESSURES

Inflation now looks set to increase, at least near term, with the Committee noting elevated price pressures in the UK and the U.S. and rises in rate expectations around the world.

Unemployment could also turn out “somewhat lower than projected," the Committee said, pointing to reduced uncertainty over Omicron and to the limited labour market effect of the hit to service sector spending from restrictions imposed in December to contain the Covid variant, thanks to government measures including a wage support scheme for affected businesses.

The strength of Norwegian public finances has made it easier for Norges to lead the way among global central banks in tightening policy, according to Governor Oystein Olsen, speaking to MNI following December's hike. That month’s forecast round had foreseen unemployment at an already-low 2.4% in 2022.

"The policy rate should be raised towards a more normal level. A gradual normalisation of the policy rate is consistent with continued high employment. Higher interest rates will also help counter a build-up of financial imbalances," the Committee said on Thursday.