Norges Bank hikes key policy rate by 25 bps, likely to hike next in March 2019

Norges Bank hiked its key policy rate today by 25 basis points to 0.75 percent, as was widely anticipated. However, the central bank surprisingly lowered the rate path by 5 to 9 basis points. This was mainly due to lower expected prices and wages and domestic demand. However, this underpins the view that the Norwegian central bank will hike rates slowly and that the next policy rate hike will come in March 2019, noted DNB Markets in a research report.

The decision to hike interest rate today was unanimous. The interest rate was last changed on 16 March 2016, then with a reduction from 0.75 percent. The Norwegian central bank has advised the finance ministry to keep the countercyclical capital buffer unchanged at 2 percent. The ministry of finance has decided to follow this advice.

The Executive Board’s current assessment outlook and balance of risks implies that the interest rate might be hiked further in the first quarter of 2019.

The fourth quarter of 2018’s rate path remained the same with an average rate at 0.76 percent. The path for the first quarter of 2019 was lowered by 7 basis points. The new path suggests a full rate hike to 1 percent in March 2019 and a new hike towards the end of 2019. Moreover, the path implies a little less than two more hikes in 2020.

The interest rate account indicates that the price of oil and the exchange rate raised the rate path. Prices and wages raised the rate path in the short run, but pulled down the path from the third quarter of 2019. Moreover, domestic demand and foreign factors added to lower the rate path.

The Norges Bank revised down the GDP growth forecast a bit to 2.5 percent for this year and revised up for next year to 2.5 percent. The central bank expects economy to grow 1.8 percent and 1.2 percent in 2020 and 2021, respectively.

Meanwhile, projections for core inflation were upwardly revised to 1.7 percent, while it was kept unchanged at 1.6 percent for 2020 and lowered to 1.7 percent for 2021. The annual wage growth projection was downwardly revised down by 0.1 percentage points to 2.8 percent this year and 3.2 percent for next year. However, the forecast was unchanged for 2020 and 2021 at 3.8 percent and 3.9 percent, respectively.