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Norway's central bank will weigh supply constraints and the continuing global spread of Covid as it considers adjusting its projected rate path.
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Norges Bank is set to raise interest rates for the first time in the cycle on Thursday, but it will weigh concerns over the global economy and capacity constraints before deciding to further consolidate its place among the first developed country central banks to tighten policy since the Covid crisis by steepening its projected rate path.
While Norway's central bank has clearly flagged the increase in its policy rate from zero to 0.25%, its Monetary Policy and Financial Stability Committee must also consider world supply chain constraints and signs of stalling growth in export markets, at a time of continued uncertainty about how long the pandemic will persist.
The previous monetary policy report in June showed the committee expected to hike each quarter from the start of 2022 through to the autumn and then ease back the tightening pace, with the policy rate reaching 1.56% at the end of the three-year forecast.
Norges Bank's projected tightening is in sharp contrast to that of neighbouring Sweden, where the Riksbank on Tuesday indicated it expects to holding its policy rate flat for three years. It is possible that Norges could further widen the gap and lift the terminal point of its forecast.
Factors Norges must consider include capacity constraints that have arisen as a result of a mix of often Covid-related disruptions to supply chains, labour shortages and the rapid growth in domestic demand following the reopening of the economy. The emergence of Covid variants and the increased uncertainty around the spread of the disease, with some signs of economic recovery faltering abroad, may also tilt against accelerating the tightening profile.
The bank's Regional Network report published this month indicated that business sector activity had accelerated markedly in recent months and was expected to expand further. But almost half of its business contacts reported capacity constraints.
Difficulties in labour recruitment will add to upward pressure on pay and the rise in energy prices will push up on inflation. There also risks that shortages in input materials could hamper output growth and real household disposable income will be squeezed by higher energy bills.
With Norway's economy escaping the Covid hit relatively lightly by international standards and with its exceptionally strong public finances, Norges Bank officials also have margin to consider the risks associated with a long period of ultra-low rates.
The policy guidance has restated the mantra that "a long period of low interest rates increases the risk of a build-up of financial imbalances." Policymakers look closely at the housing market, though, after a period of fairly sharp inflation following the Covid shock, the anticipated rise in interest rates may already be helping to cool the housing market, according to experts cited by MNI. (see MNI: Norwegian House Prices To Cool Fast As Norges Tightens)