Norway steps up rate rises and warns of more to come

Norway has increased interest rates for a second time this year to 1.75 per cent and plans a further rise next month to counter what the central bank described as “persistent global price pressures”.

The central bank raised borrowing costs 0.5 percentage points on Thursday, following a similar move in June. It plans another increase next month to counter inflation which is now at 6.8 per cent — more than three times higher than the central bank’s target of 2 per cent.

“A markedly higher policy rate is needed to ease the pressures in the Norwegian economy and to bring inflation down towards the target,” said Ida Wolden Bache, governor of Norges Bank.

The accelerated pace of rate rises would reduce the risk of inflation becoming entrenched at a high level, the Monetary Policy and Financial Stability Committee said in a statement on Thursday.

Central banks around the world have raised rates aggressively in response to inflation, which is now at multi-decade highs in several economies following a surge in global food and energy costs.

Norges Bank cautioned that there was a possibility of a sharper slowdown in global growth, noting that a rise in interest rates and high inflation could cool down the housing market and household consumption.

The more aggressive messaging from the central bank led analysts to change their forecasts for interest rates.

“We now expect the bank to make it a hat trick of 50 basis-point hikes at the next meeting in September,” said Jack Allen-Reynolds of Capital Economics. “With price pressures looking strong, further rate increases are likely to follow.”

Economists at the US bank Goldman Sachs raised their forecast for how quickly Norges Bank would increase rates in the future on Thursday, predicting it would lift its policy rate by a quarter percentage point at every meeting until it reaches 3 per cent in March 2023.

Unlike other economies in North America and Europe, however, Norway’s rate rises are unlikely to trigger a recession.

The country is receiving record income from oil and gas as other European countries turn to western Europe’s leading petroleum producer to fill the gap created by the loss of Russian supplies. Norway’s economy also benefits from inflows from the world’s largest sovereign wealth fund worth $1.2tn.

Investors have scaled back their expectations of how far the European Central Bank will raise rates, betting it will pause its policy tightening as the eurozone faces recession this winter following squeezed supplies of Russian gas.

However, ECB executive board member Isabel Schnabel indicated a likely 0.5 percentage-point rise in September after a similar-sized move last month.

“Even if we entered a recession, it’s quite unlikely that inflationary pressures will abate by themselves,” Schnabel told Reuters in an interview published on Thursday.

“In July, we decided on a 50 basis-point hike in light of the inflation outlook. At the moment I do not think this outlook has changed fundamentally,” she said.

The Federal Reserve has been even more aggressive, raising rates by 0.75 percentage points for the second consecutive month in July. Minutes from the rate-setting meeting, published on Wednesday, signalled that policymakers were keen to press ahead with a tightening of monetary policy.

Rising US rates are also having an impact on developing nations as many commodities are priced in dollars within global markets.

On Wednesday, Ghana’s central bank raised interest rates by 300 basis points to 22 per cent — the largest increase since 2002 — as it sought to tame rising inflation and the depreciation of the country’s currency.