MNI STATE OF PLAY: Norges Bank Hikes Faster, May Peak Earlier

The Norges Bank hiked in August at a faster pace than it had anticipated in its June forecast, raising the policy rate by 50 basis points to 1.75 percent, saying that more rapid tightening now may ease the need for more hikes later.

The Monetary Policy and Financial Stability Committee's forecasts back in June were compatible with 25 basis point hikes at each of the four remaining meetings this year, starting with the August meet, with the policy rate then climbing to 3% by summer 2023. August’s decision and commentary now suggest that peak in the policy rate could be reached earlier than previously assumed.

With no new projections to accompany the decision at the interim August meeting, the focus now will be on the next policy path pronouncement, due in September, when the central bank will have completed another comprehensive forecast round. The rate path projected is set to be steeper than June’s, but it is open to question whether the peak will be higher.

Governor Ida Wolden Bache said in a speech following today’s policy announcement that "We could have decided to raise the policy rate more gradually. But then we would have run the risk of inflation becoming entrenched at a high level. That would have made it more difficult to bring inflation down and could have required a sharper tightening of monetary policy somewhat further out."

SEPTEMBER LIKELY

She did not provide any further guidance on the size of the next hike, which she acknowledged was "likely in September", or the expected peak in rates.

The target CPI-ATE inflation measure came in at 4.5% in July, more than a percentage point above Norges Bank's estimate, and the data showed widespread price increases rather than simply reflecting higher energy prices.

Evidence of mounting domestic price pressures, along with higher global inflation, were key to the committee's unanimous August decision.

"External developments are only part of the story. The rise in prices for domestically produced goods and services has also accelerated in recent months. One of the main reasons for this is the pressures in the Norwegian economy," the statement noted.

LABOUR MARKETS TIGHT

The committee's brief policy analysis described the domestic labour market as tight with a high level of job vacancies while registered unemployment, at just 1.6 percent, sits a touch below the Norges Bank’s previous expectations.

The risks around the September forecast, however, are going to be two-sided and the door will be left open to reverting to slower tightening if need be, with downside risks to overseas demand sizeable as the euro area and UK, among others, teeter on the brink of recession.

KRONE MAY SLOW IMPORTED INFLATION

The krone appreciated more than anticipated before the August meeting and the 50-bps hike and indications of further tightening are likely to bolster the currency, which would push down on import price inflation.