October 24, 2021

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Norges Bank raises key rate to 0.25 percent - announces new rate hike in December

Norges Bank raises key rate to 0.25 percent – announces new rate hike in December

For the first time since the start of the pandemic, the key policy rate will be raised from the historical zero percent to 0.25 percent.

The normalization of the economy suggests that it is now appropriate to begin a gradual normalization of the key policy rate, says Governor Austin Olsen.

At the same time, the central bank announces a faster rate hike. The central bank writes that the interest rate path means that the interest rate is raised a little faster and ends up at a slightly higher level than expected in the previous report.

The Norges Bank estimates that the key rate is likely to be raised again in December to 0.50 per cent. Towards the end of 2024, the central bank sees a key interest rate of 1.68 percent.

Shortly after the interest rate decision was presented, the Norwegian krone rose to 8006 against the dollar and 10.08 against the euro. This means that the Euro is at its lowest level since June.

The interest rate path is Norges’ forecast of what interest rate developments will look like in the next few years. The central bank is free to change its forecast if the state of the Norwegian economy dictates.

Significant recovery in the Norwegian economy

The reopening of society has contributed to a noticeable recovery in the Norwegian economy, and activity is higher than it was before the Corona pandemic. At the same time, unemployment has fallen, and capacity utilization appears to be close to normal. The prevalence of infection increased after the summer, but the high degree of vaccination limited the need for infection control measures.

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These are the factors on which the central bank depends in raising interest rates, and the outlook is also good going forward.

– We expect the uptick in the economy to continue throughout the fall, Central Bank Governor Austin Olsen says at the press conference after the interest rate decision.

Additional improvements

The economic recovery is likely to continue throughout the fall. Core inflation is low, but increased activity and increased wage growth will eventually push it toward the 2 percent target, the central bank wrote in a press release.

The zero interest rate was introduced as a measure to maintain economic activity in connection with the pandemic crisis in the spring of 2020, and is often referred to as expansionary monetary policy.

The central bank is now indicating that there is no longer a need for an even expansionary monetary policy, and that consideration of confronting fiscal imbalances speaks in favor of higher interest rates. At the same time, Norges Bank stresses that there is uncertainty over whether the effects of higher interest rates indicate that the key policy rate will gradually raise.

Prior to the rate decision, there was broad agreement among economists that a rate hike should be necessary, so the message does not come as much of a surprise, according to TDN Direkt.

In June, Governor Oistin Olsen clarified that the key policy rate would likely be raised in September. He reiterated this message at the interim meeting in August.

Electricity prices

Norwegian electricity prices are rising to record levels, and are likely to affect consumption.

“High electricity prices weaken household consumption Since most households in Norway have energy contracts where the price is linked to the spot price of electric energy, an increase in energy prices will directly affect their purchasing power. The monetary policy report stated that the increase in spot and forward prices since the previous report led separately to raising expectations for growth in the consumer price index by 0.5 percentage points this year and 0.3 percentage points next year.

“The significant savings during the pandemic give households scope to increase consumption significantly in the next few years. Increased electricity prices, removal of subsidy measures and higher interest rates will reduce the real income available to households in the future.” Central Bank writes.(Terms)Copyright Dagens Næringsliv AS and/or our suppliers. We want you to share our cases using a link that leads directly to our pages. All or part of the Content may not be copied or otherwise used with written permission or as permitted by law. For additional terms look here.