Norway Hikes for First Time Since 2023, Taking Lead in Europe

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(Bloomberg) — Norges Bank delivered western Europe’s first hike in borrowing costs since the outbreak of the Iran war, opting for immediate action to tackle stubbornly high inflation.

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The Norwegian central bank increased its key deposit rate by a quarter point to 4.25% on Thursday. The move, its first tightening step since 2023, was predicted by only five out of 17 economists surveyed by Bloomberg, while most anticipated no change.

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Officials didn’t offer any specific hints about future steps, saying that their action reflected the outlook shared with investors at the last decision in March. That had pointed to the possibility of an increase to between 4.25% and 4.5% by the end of the year.

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“Inflation is too high, and there are prospects that inflation will remain elevated ahead,” policymakers led by Governor Ida Wolden Bache said in a statement. “The committee judges that a higher policy rate is needed to return inflation to target within a reasonable time horizon.”

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The decision places Norges Bank alongside the Reserve Bank of Australia at the hawkish end of the spectrum of advanced-economy central banks. Regional peers in the euro zone and the UK will wait until June before any move, and the Riksbank in neighboring Sweden just signaled no imminent change at all.

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The Norwegian krone extended earlier gains versus the euro to rise as much as 0.6% to 10.8632.

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While policymakers within Europe are mainly concerned about energy price-risks emanating from the Middle East crisis, Norway’s officials have also been caught out by persistent domestic price growth. Core inflation exceeding 3% has been fueled by the lowest unemployment and stickiest wage costs in Scandinavia.

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Investors had already boosted bets for a May hike, but the move still signals stronger resolve by Norges Bank to bolster credibility after persistently missing its 2% inflation target. That goal has eluded it ever since the start of 2021. Against that backdrop, economists are now questioning the prospects of a further possible move in due course.

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“Another rate hike could come in September, given that energy prices and inflation remain on the high side, and labor market developments remain stable,” SB1 Markets AS analysts Dane Cekov and Harald Magnus Andreassen, who had projected a hike on Thursday, said in a report. “A further rate hike this year is clearly more likely than a rate cut.”

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Josie Anderson, an economist at Nomura Plc in London, said that any such move is likely to depend on inflation outcomes incoming months. 

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“The committee has clearly lost patience with sticky inflation,” she said in a report. “However, it is uncertain about where inflation will go from here, even without the global energy shock.”

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A summary of Norges Bank’s deliberations suggested that there wasn’t disagreement on the decision to hike, saying that officials “collectively judged” that there was a need to act now. 

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Earlier on Thursday, peers in neighboring Sweden kept their rate unchanged at 1.75% while sticking with a wait-and-see stance on policy that places it more toward the dovish end of the spectrum in Europe. 

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“Recent inflation outcomes have been clearly lower than the Riksbank’s forecast both including and excluding energy prices,” the central bank there said. “This together with the weak economic activity at the outset means that there is scope to wait until there is a clearer picture of the effects of the war and the supply shocks it entails.” 

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Handelsbanken analyst Magnus Lindskog described the outcome as a “mild dovish tilt.”

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The Reserve Bank of Australia on Tuesday raised its rate for a third consecutive meeting, cementing its own stand-out status among rich-world central banks.

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—With assistance from Joel Rinneby, Vassilis Karamanis and Naomi Tajitsu.

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(Updates with analysts starting in ninth paragraph)

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