Norway’s central bank lifted the benchmark rate by a steeper-than-expected 50 basis points and hinted at another increase in August as higher wage growth and a weaker currency are set to push inflation higher in coming months.
The Monetary Policy and Financial Stability Committee of Norges Bank decided to hike the policy rate to 3.75 percent from 3.25 percent. Economists were looking for a quarter-point raise.
The previous change was in May, when the rate was increased by 25 basis points.
Policymakers assessed that a higher policy rate than previously signaled is needed to bring inflation down to target.
“If we do not raise the policy rate, prices and wages could continue to rise rapidly and inflation become entrenched,” Governor Ida Wolden Bache said.
“It may then become more costly to bring inflation down again,” Bache added.
The governor said the future interest rate path depends on economic developments. The policy rate forecast was revised up since the March meeting with the rate projected to rise to 4.25 percent in the course of autumn.
The newly forecasted peak rate of 4.25 percent will be hit by the end of the third quarter, ING economists said. This will put the Norwegian krone in a stronger position, especially against its closest peer Swedish krona.
There is a good chance that the central bank will hike the rate by 50 basis points again at the next meeting in August, Capital Economics’ economist Jack Allen-Reynolds said.
The currency is likely to see a renewed depreciation in the coming months as economic growth remains weak or slows in most advanced economies, weighing on investor risk appetite and taking a toll on high-beta currencies like the krone, the economist noted.
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