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Free AccessNORGES BANK WATCH: Hikes 50 BPS To 3.75%, Foresees 4.25% Peak
Norges Bank increased its policy rate by 50 basis points to 3.75% at its June meeting, at the top end of expectations, and said it was likely to hike again in August.
The Norwegian central bank said it now expects to lift the policy rate to 4.25% by the autumn, up from the projected rate peak of 3.6% in its previous forecast, suggesting 25bp hikes are likely at each of the next two meetings The Monetary Policy and Financial Stability Committee then expects the policy rate to hold close to peak until an only very gradual reversal starting in 2024.
The detailed rate projections showed the policy rate close to 4.0% by the fourth quarter of 2024, 3.45% in Q4 2025 and 2.88% at the end of the three-year forecast.
Governor Ida Wolden Bache justified the 50bp hike by warning of the dangers of higher inflation becoming entrenched with strong earnings growth and krone weakness. (See MNI INTERVIEW: Norges Could Move To Larger Hikes - Governor)
WAGES GROWTH
The quarterly Monetary Policy Report issued alongside the rate decision highlighted labour market tightness and the rise in expected earnings. Wage growth was 4.3% in 2022 and Norges Bank projected that it would rise to 5.5% this year before declining gradually from 2024 onwards.
"The Committee gave weight to the risk that prices and wages could continue to rise rapidly and inflation become entrenched if monetary policy is not tightened. It may then become more costly to bring inflation down again," it said in its policy statement.
The projections showed the CPI-ATE target inflation rate above the 2.0% goal throughout the forecast period. CPI-ATE was projected to be 6.3% this year, up 0.7 percentage point from the previous forecast, 4.6% in 2024, 3.3% in 2025 and 2.4% in 2026.
Norges Bank economists revisited their assessment of the neutral real interest rate, r*, in the MPR which suggested that the central bank is set to hold policy above it for a time to dampen inflation. Its judgement was that r* was in the upper part of a range between -0.5% and 0.5% based on its models although market based estimates now have it markedly higher, with an expected real interest rate of around 1%–1.5% in Norway.
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Why MNI
MNI is the leading provider
of intelligence and analysis on the Global Fixed Income, Foreign Exchange and Energy markets. We use an innovative combination of real-time analysis, deep fundamental research and journalism to provide unique and actionable insights for traders and investors. Our "All signal, no noise" approach drives an intelligence service that is succinct and timely, which is highly regarded by our time constrained client base.Our Head Office is in London with offices in Chicago, Washington and Beijing, as well as an on the ground presence in other major financial centres across the world.