Norway’s central bank paused monetary tightening while signaling that a likely quarter-point increase in borrowing costs in March is needed to bring inflation under control.
It kept the key deposit rate on hold at 2.75 percent yesterday, as forecast by a majority of economists in a Bloomberg survey.
Norges Bank Governor Ida Wolden Bache said the benchmark “will most likely be raised in March,” an outlook that would chime with guidance last month that the key interest rate should increase to “around 3 percent” this year.
Photo: Bloomberg
“The policy rate will need to be increased somewhat further,” officials said.
Even so, the rate “has been raised considerably over a short period of time, and monetary policy has started to have a tightening effect on the economy. This may suggest a more gradual approach to policy rate setting,” they said.
The krone pared losses after the decision, trading 0.4 percent weaker at about 10.72 against the euro as of 9:30am in London.
Norway’s currency has weakened 7 percent over the past 12 months versus the euro, the biggest depreciation among G10 peers together with the Swedish krona.
Traders trimmed bets on rate hikes by June to 54 basis points, the lowest in more than a month, according to forward-rate agreements.
The decision does not give any clear indication on whether Norway might be among the first in the G10 sphere of major currency jurisdictions to end monetary tightening, after it led that group to start rate hikes in September 2021.
Marius Gonsholt Hov, an analyst at Svenska Handelsbanken AB in Oslo, said he believes the peak is at hand.
“Norges Bank will deliver another 25 basis-point rate hike in March, to 3 percent, but that is also the peak in our view,” Gonsholt Hov said. “Further ahead, we believe that Norges Bank will stick to 3 percent for the remainder of this year, to be sure that inflationary pressures are in fact abating.”
In contrast, Nordea Bank Abp’s Kjetil Olsen and Dane Cekov continue to forecast a last hike to 3.25 percent in June after a March move, saying they “still think developments in the economy going forward will be slightly better” than the central bank forecasts, “and there is also upside risk to wage growth.”
With inflation slowing to a seven-month low and the fossil-fuel-rich economy facing a mild recession, the central bank has adopted a more cautious stance just as the government also considers a slowdown in inflation to be its key priority.
If Norway does conclude rate hiking in coming months, it would not be the only one among other advanced economies. Australia and Canada have also signaled they are nearing an end to rate hikes.
Officials at the European Central Bank are pondering whether to start slowing down in due course even as it has indicated more increases in borrowing costs.
The announcement did not feature new economic forecasts or projections for rates, as the decision was a so-called interim one.
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