Norway has become the latest central bank to surprise markets with a bigger-than-expected rate rise, increasing borrowing costs by 50 basis points as it warned of the possibility of inflation moving even higher.
Norges Bank raised interest rates by a half percentage point for the first time in almost two decades on Thursday, leaving benchmark borrowing costs at 1.25 per cent.
“Prospects for a more prolonged period of high inflation suggest a faster rise in the policy rate than projected earlier. A faster rate rise now will reduce the risk of inflation remaining high and the need for a sharper tightening of monetary policy further out,” said Ida Wolden Bache, governor of Norges Bank.
Most economists had expected a 25 basis point move, making policymakers in Oslo the latest to confound expectations with a bigger rise in borrowing costs to tame surging inflation.
The US Federal Reserve raised rates by 75 basis points for the first time since 1994 earlier this month, and had been forecast to raise it by 50 basis points until just days before the meeting. Other central banks from Iceland to India that have resorted to large increases to attempt to tame inflation that is now at multi-decade highs in many economies following sharp rises in the cost of energy and food.
In mainland Europe, the Swiss National Bank raised rates unexpectedly and by 50 basis points to minus 0.25 per cent, while the Czech National Bank earlier this week increased borrowing costs by 125 basis points to 7 per cent.
However, unlike in most other economies in North America and Europe, Norway’s rate rises are unlikely to raise the prospect of a recession.
As western Europe’s leading petroleum producer, Norway is enjoying an economic boom, with the central bank noting that unemployment was at a “very low level” and that there was little spare capacity.
That boom meant Norges Bank last year became the first big western central bank to raise rates after the start of the Covid-19 pandemic. Growth is expected to remain strong this year at 3.5 per cent, though this latest estimate from the central bank is lower than forecasts made earlier in 2022.
Most economists in Norway had banked on a smaller rise as the country had started its tightening cycle early. As more than 90 per cent of mortgages have floating interest rates, the impact of higher policy rates also has a quicker and more direct impact on the economy than elsewhere.
But Norges Bank sounded the alarm over the prospect of even higher inflation and argued that given Norway’s tight labour market unemployment was likely to remain low.
“Underlying inflation has picked up quickly and has been higher than projected. With rising wage growth and imported goods inflation, there are prospects that inflation will remain above the target for some time,” it added.
Norges Bank said it was likely to raise rates at its next meeting in August and indicated that rates could be 2.25 per cent by the end of the year and 3 per cent by next summer.
Economists at Nordea, the Nordic region’s biggest lender, called the increase “somewhat surprising”, and added: “A view for higher inflation for longer is the main reason for this hawkish move from Norges Bank.”
Norway is receiving record income from oil and in particular gas as other European countries seek an alternative to Russian petroleum. Its economy also benefits from regular inflows from the world’s largest sovereign wealth fund worth $1.2tn.