Norway set for quarter-point hike as peak rate nears

Norges Bank will probably raise the benchmark deposit rate by 25 basis points to 4% – the highest level since the 2008 financial crisis, according to all 17 economists in a Bloomberg survey. — Bloomberg

Oslo: Norway’s central bank is poised to slow the pace of monetary tightening this week in what may prove its penultimate step in this hiking cycle.

Norges Bank will probably raise the benchmark deposit rate by 25 basis points to 4% – the highest level since the 2008 financial crisis, according to all 17 economists in a Bloomberg survey.

Having already increased borrowing costs 375 basis points since September 2021, officials meet against the backdrop of favourable inflation data and a rebound in the weak krone.

The decision will not be accompanied by new economic forecasts or projections for the rate path, as this week’s meeting is a so-called interim one.

Recent economic data, including a slowdown in stubbornly high consumer price growth, has supported the case for smaller increases in borrowing costs this month and next after a half-point hike in June.

It’s relieved pressure on policymakers who were surprised earlier this year by weakness in the Norwegian currency after global peers pushed through faster rate increases and the oil price – a key data point for fossil-fuel exporting Norway – declined.

“We see very little scope for a double hike this time around,” said Kjetil Martinsen, Swedbank AB’s chief economist for Norway.

“The spring developments in the krone were likely an unpleasant reminder for Norges Bank that they cannot deviate much from the hiking pace of other central banks, such as the European Central Bank, the Federal Reserve and the Riksbank.”

The ECB avoided signalling a plan for its September meeting after raising the key rate to 3.75% last month, the same level as Sweden’s Riksbank.

The last three hikes by policymakers in Frankfurt have been a quarter point each. The Fed in July raised its benchmark rate to a target range of 5.25%-5.5%, a 22-year high.

Norwegian officials led by governor Ida Wolden Bache said in June the rate will “most likely be raised further in August”, and forecast a peak in borrowing costs at 4.25% later this year.

That chimes with what economists are projecting, with a consensus converging on a high of 4.25% to be reached this quarter and maintained for the next year, according to a survey by Bloomberg News.

The krone – the second-worst performer among the Group-of-10 currencies this year – is now 1.6% stronger than the central bank’s projection for the third quarter, based on the import-weighted krone exchange rate.

“Potential krone weakness will remain as a latent factor as long as the high inflation momentum stays an issue,” Swedbank’s Martinsen said, noting sensitivity to global energy prices and risk sentiment as factors alongside other central banks’ moves.

For now, a somewhat stronger krone counteracts problems posed by better-than-expected consumption and labour market in the fossil-fuel-driven economy that started its tightening campaign ahead of rich peers in the third quarter of 2021 but kept a measured pace.

“There was some excitement among market participants whether Norges Bank could once more hike by 50 basis points after the inflation up-shoot in June,” Dane Cekov, a senior strategist with Nordea Bank Abp, said in a note to clients. — Bloomberg