50 is the new 25 for the Norges Bank
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50 is the new 25 for the Norges Bank

Following today’s decision by the Norges Bank to raise its policy rate by 50bp at the second consecutive meeting, we now expect the Bank to make it a hat-trick of 50bp hikes at the next meeting in September. With price pressures looking strong, further rate increases are likely to follow.
  • Following today’s decision by the Norges Bank to raise its policy rate by 50bp at the second consecutive meeting, we now expect the Bank to make it a hat-trick of 50bp hikes at the next meeting in September. With price pressures looking strong, further rate increases are likely to follow.
  • Fourteen economists (including ourselves) polled by Refinitiv correctly predicted that the Norges Bank would raise its policy rate by 50bp, whereas eight analysts expected the Bank to stick to its guidance from June that it would hike by 25bp. The policy rate is now at 1.75%, its highest level since February 2012.
  • In justifying its decision to raise rates by more than it had signalled in June, the policy statement noted that there was little spare capacity in the economy, unemployment is low and inflation has been “considerably higher” than policymakers had expected.
  • That view was supported by the Q2 data released this morning. Mainland GDP rose by 0.3% m/m in June, which meant that over the second quarter as a whole the economy grew by 0.7% q/q. That left it 3.6% above its level in Q4 2019. And thanks to the surge in oil and gas prices, total GDP in nominal terms – which includes the offshore oil and gas sector – has risen by more than 40% since the start of 2021.
  • Meanwhile, the labour market is tight. Employment rose by 0.6% q/q to a new record high in Q2 and total hours worked increased by 1.3%. The latest survey measure of labour shortages points to a sharp acceleration in wage growth to come. (See Chart 1.)
  • In turn, that would add to Norway’s inflation problem. Inflation was stronger than the central bank expected in both June and July, and with CPI-ATE at 4.5% in July the Bank’s forecast for it to average 3.8% in Q3 looks out of reach. (See Chart 2.) We will have to wait until next month for the Bank’s new forecasts.
  • Turning to the interest rate outlook, we now expect another 50bp hike in September. After hiking by more than it signalled at its last meeting, the Norges Bank has chosen to give less precise guidance about its plans for its next meeting, stating that “the policy rate will most likely be raised further in September”. But several points in the policy statement suggest that policymakers are minded to continue tightening fairly aggressively.
  • Indeed, it stated that “a markedly higher policy rate is needed” and that the inflation outlook justified “a faster rise in the policy rate than forecast in June”. The Bank also argued that a faster pace of monetary tightening would reduce the risk of inflation getting out of control, and thereby reduce the risk of interest rates having to rise even further and faster in future.
  • So September is unlikely to be the end of the tightening cycle. The Norges Bank’s forecasts in June showed the policy rate peaking at just over 3% at the end of next year – policymakers’ new thinking suggests that they want to get there more quickly, perhaps with more 50bp hikes after September.

Chart 1: Labour Shortages & Labour Costs

Chart 2: Norway Inflation (%)

Source: Refinitiv

Sources: Refinitiv, Capital Economics


Jack Allen-Reynolds, Senior Europe Economist,

jack.allen- reynolds@capitaleconomics.com

Jack Allen-Reynolds Senior Europe Economist
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