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Norway Delivers Rate Hike That Most Economists Weren’t Expecting

Sveinung Sleire
Norway Delivers Rate Hike That Most Economists Weren’t Expecting

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Norway’s central bank just broke further away from the pack, delivering its fourth interest-rate increase in a year in an effort to cool an economy stoked by oil investments.

Norges Bank raised its benchmark rate by a quarter of a percentage point to 1.50% on Thursday, the highest level in almost five years. Four of the six biggest Nordic banks had expected the move, but most other forecasters didn’t.

The decision is a “cautious” step toward a more “normal” policy rate, Governor Oystein Olsen said in an interview on Bloomberg Television with Francine Lacqua and Tom Keene.

Dubbed by local economists as one of the “last hawks,” Norges Bank has stood out for its commitment to tightening as both the European Central Bank and the Federal Reserve deliver more stimulus. Fed Chairman Jerome Powell on Wednesday pointed to the fallout of a global trade war as something that should give monetary policy makers pause.

But Norway’s economy has so far withstood those pressures. The country of 5.3 million people with vast oil reserves and a $1 trillion wealth fund built from its fossil-fuel riches, is in many respects “lucky,” Olsen said.

Norway has benefited this year from a surge in investments in its oil industry, and the government has spent the past four years pumping record sums of petroleum cash into the economy. That’s allowed Olsen to avoid the more drastic policy measures such as negative rates that his colleagues have resorted to.

But Olsen also made clear that Norges Bank’s hike on Thursday could mark the end of its current tightening cycle, acknowledging that risks abroad make it harder to Norway to go it alone.

“Other central banks have been and still are in a much more difficult situation,” he said. “I think all central banks, even those which have gone into these unconventional monetary policy, realize that if it prevails and goes on and on, there are some negative effects of rates being negative, also regarding unconventional measures.”

The krone initially rose as much as 0.5% against the euro but then pared those gains. The recent weakness in the currency played a large part in giving Norway the leeway it needed to raise rates.

“The significantly weaker currency level of the krone than we foresaw in June is obviously a factor affecting the decision and the future outlook of the policy path,” Olsen said.

Though some market participants expected this move, “it’s nonetheless remarkable that a central bank is going completely against the flow and raising rates, while central bankers across the world are in the process of cutting,” said Frederik Engholm, chief strategist at Nykredit in Copenhagen.

Olsen presented Norway’s rate decision on a day full of central bank announcements. Moments earlier, the Swiss National Bank had kept its main rate at a record low of minus 0.75%, following a cut by the Fed late on Wednesday.

Martin Enlund, chief analyst at Nordea in Stockholm, drew attention to the history of adjustments to the rate path made by Norges Bank.

The Norwegian government, which is backed by the world’s largest sovereign-wealth fund, has provided the kind of stimulus that most other European nations can only dream of. Norway will spend the equivalent of almost 8% of GDP this year to plug a budget shortfall. Against that backdrop, unemployment is anticipated to stay below 4% and inflation is seen holding above the 2% target.

Read More About Norges Bank’s Reasoning:

“The policy rate forecast indicates a slightly smaller rate rise than in the June Report. Weaker growth prospects and lower interest rates abroad have contributed to the downward revision. Slightly lower inflation and a somewhat less tight domestic labor market compared with the June projections have also pulled down the rate path. A weaker-than-projected krone has in isolation pulled up the policy rate path. With a policy rate in line with the forecast, inflation is projected to remain close to the inflation target in the years ahead, at the same time as unemployment remains low. The policy rate path will be adjusted in response to a change in economic prospects or the balance of risks.”

Olsen has stuck with a strategy he calls “leaning against the wind” to fight financial imbalances, while benefiting from the persistently weak krone.

--With assistance from Nick Rigillo, Harumi Ichikura and Angela Feliciano.

To contact the reporter on this story: Sveinung Sleire in Oslo at ssleire1@bloomberg.net

To contact the editors responsible for this story: Jonas Bergman at jbergman@bloomberg.net, Tasneem Hanfi Brögger

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