Norway raises interest rates in first increase by major central bank

Central banks updates

Norway’s Norges Bank became the first of the world’s major central banks to increase interest rates after the Covid-19 pandemic, and said more interest rate rises would come soon.

The bank on Thursday lifted rates by 0.25 percentage points from their record low of zero, citing economic activity that was above its pre-pandemic level and the need to counter a build-up of financial imbalances. It indicated another rise was likely in December and that rates would reach about 1.7 per cent by the end of 2024.

Other western central banks are split over when to begin tightening policy even as economies rebound quickly and some economists fret about rising inflation. Countries such as Iceland, South Korea and Brazil have already raised rates but Norway is the first country that belongs to the group of 10 most-traded currencies to do so.

Several policymakers at the US Federal Reserve said on Wednesday that they expected a first rate rise next year, while Sweden’s Riksbank this week confirmed it was set to remain at zero until at least late 2024. Switzerland is keeping its ultra-loose policy with rates of minus 0.75 per cent, its central bank said on Thursday.

Norway, home to the world’s largest sovereign wealth fund with $1.4tn in assets, has rebounded strongly from the first wave of Covid last year when Norges Bank cut interest rates by 1.5 percentage points in a matter of weeks. 

Governor Oystein Olsen pointed to the Fed also soon starting to reverse its “very expansionary policy”. He told a press conference: “There is a strong recovery in the Norwegian economy. Then it’s fine to start a gradual normalisation of the policy rate. Other countries have different policy considerations.”

Norway at present has low underlying inflation but the central bank forecast it would rise closer to the 2 per cent target, thanks to wage growth and a strengthening economy.

Its central bank judged that “the risk of inflation becoming too high is limited” and indicated up to five more rate increases by the end of next year. “Yet another hawkish tilt,” was the judgment of analysts at Nordea, the Nordic region’s biggest lender.

The central bank expects the economic upturn to continue through the autumn thanks to greater capacity utilisation, a high Covid vaccination rate and unemployment falling to just 2.7 per cent of the workforce.

“The objective of countering the build-up of financial imbalances also suggests higher interest rates,” it warned. “Uncertainty surrounding the effects of higher interest rates warrants a gradual rise in the policy rate.”

Norges Bank also noted the emergence of new Covid variants and how they could affect the economy, but said it still expected the rebound to continue as households spent savings accrued during the pandemic, especially on services. 

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