Norges Bank says high interest rates needed for some time

Norway’s central bank kept borrowing costs at a 16-year high and reiterated the need for durably tight monetary policy to squeeze inflation out of the economy.

Norges Bank held the key deposit rate at 4.5 per cent on Thursday (Jan 25), as predicted by all analysts in a Bloomberg survey. That’s the highest since December 2008. 

This being a so-called interim meeting, officials didn’t provide new forecasts, nor did they elaborate on their outlook from December that rates could begin to see a gradual decline from the “autumn.” 

“There will likely be a need to maintain a tight monetary policy stance for some time ahead,” Governor Ida Wolden Bache and colleagues said in a statement, sticking to language they used last month. Changes in the outlook could force either another rate hike or an earlier cut, they added. 

Bigger peers such as the European Central Bank have sought to push back against aggressive bets on easing, needing to see more evidence that inflation has been tamed. While the krone has strengthened recently, its weakness in recent years has stoked price growth, giving Norwegian policymakers cause to tread even more carefully before considering rate cuts. 

Officials highlighted the recent increases in the currency, saying that it’s “stronger than expected,” while also noting that its losses last year “will likely restrain disinflation.” 

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Most analysts see the currency gaining this year. Some – including Norway’s largest lender DNB Bank – see more weakness as they don’t expect bets of imminent rate cuts globally to materialise. 

Norway’s slower rate hikes versus the Federal Reserve and the ECB have been cited as a key reason for its relative losses, along with declining fossil-fuel prices.

Core price growth slowed in December by more than most analysts expected, while staying close to the central bank’s estimate. 

Adding to evidence of a slowdown, the mainland economy contracted in November for the first time in three months. Even so, with a weaker krone boosting profitability in Norwegian industry, the upcoming round of wage bargaining this spring could fuel concerns of a potential wage-price spiral. BLOOMBERG