NORGES WATCH: Norges Hikes By 25Bps, Points to More Tightening

Norges Bank delivered a widely-expected 25-basis-point hike at its December meeting, lifting the policy rate to 2.75% as its projections pointed to a close call between one or two more 25 bps hikes this cycle even as the economy looks set to slow.

The policy rate projection in the December Monetary Policy Report was, in the near term, almost identical to that published in September with the rate peaking at 3.11% in the third quarter of 2023. This leaves the door ajar to another 25 bps hike, with Governor Ida Wolden Bache stating that the next increase was most likely to come in the first quarter of next year.

Norges Bank was ahead of other advanced economy central banks in starting its tightening cycle and could be one of the first to hit peak, with its projection showing the policy rate declining to 2.38% three years ahead compared with 2.56% in the previous forecast, suggesting three or four rate cuts to come within the forecast horizon.

Wolden Bache said inflation had been higher and would stay higher than the central bank had previously forecast, justifying further tightening,

The projections showed the target CPI-ATE measure peaking on a quarterly basis at 5.85% in the first quarter of next year and still at just over 4.0% by the close of the next year. It remains above target, at 2.45%, at the end of the three-year forecast.

BROAD-BASED INFLATION

"Our aim is to reduce inflation by raising the policy rate," Wolden Bache said, noting that prices had risen rapidly across a range of goods and services and not just in the energy sector.

Even as inflation remains sticky, Norges Bank found evidence of a gathering slowdown in the economy, though this starts from a strong base of high employment, low unemployment and better-than-anticipated growth this year.

The bulk of firms expect a decline in activity ahead while recruitment difficulties have eased, the central bank's Regional Network Report found. House prices are also declining and pay growth is running below inflation.

The projection for GDP growth was cut 0.2 percentage point to 0.6% for both 2023 and 2024 and raised to 0.3% for 2025. While the oil sector should expand, mainland GDP, which excludes the vast offshore energy business, was forecast to decline by 0.1% next year and grow by just 0.2% in 2024.

"When setting the policy rate, we are concerned with balancing the risk of tightening too much against the risk of tightening too little,” Wolden Bache said. “Monetary policy has started to have a tightening effect, and we have not yet seen the full effect of the rate hikes.