Norges Bank maintains key interest rate at zero, new rate path suggests first hike in Q4 2022

Norges Bank kept its key interest rate unchanged at zero during its meeting today. The central bank considerably revised up both their view of the economy and the rate path. The new path indicates a first hike in the fourth quarter of 2022, a clear hawkish tilt, noted Nordea Bank in a research report.

The new rate path suggests a first rate hike in the fourth quarter 2022 and three hikes in total by end 2023. Norges Bank surprised the market on the hawkish side. Forward rates are up 2-7 basis points and NOK appreciated by 1 percent. The report sends a significant signal: Norges Bank wants to begin normalizing rates as quick as the economy permits them to.

“The revisions must be seen in light of a stronger rebound in the economy than projected, particularly for household demand. Nordea’s own card transaction statistics is corroborating this view. The rise in house prices has also been higher than Norges Bank expected and unemployment has decreased faster than expected”, noted Nordea Bank.

A higher oil price and tax changes for the oil sector has also added to a less pessimistic view on oil investments. GDP for Mainland Norway is now expected to fall “only” 3.5 percent in 2020, compared to 5.3 percent in May. The output gap is likely to be closed in 2023.

The central bank still underlines the significant uncertainty regarding developments ahead. However, uncertainty goes both ways. Norges Bank stands ready to raise interest rates faster than indicated “if output and employment increase faster than projected, or there are signs of accumulating financial imbalances”.

Meanwhile, if the downturn last longer due to a resurgence in infections the policy rate might remain at zero longer than suggested by the rate path. Negative rates are yet again not ruled out clearly.