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Norway makes surprise 50 basis point rise

Norway has become the latest central bank to surprise markets with a higher-than-expected rate hike, pushing borrowing costs up 50 basis points as it warned of the possibility of inflation rising even higher.

Norges Bank raised interest rates by half a percentage point for the first time in nearly two decades on Thursday, keeping benchmark borrowing costs at 1.25 percent.

“Prospects for a longer period of high inflation point to a faster rise in key rates than previously estimated. A faster rate hike now will reduce the risk of inflation remaining high and further reduce the need for sharper monetary policy tightening,” said Norges Bank governor Ida Wolden Bache.

Most economists had expected a 25 basis point move, leading policymakers in Oslo to be the last to mistake expectations for a larger rise in borrowing costs to curb rising inflation.

The US Federal Reserve raised rates by 75 basis points for the first time since 1994 earlier this month, and was forecast to raise it by 50 basis points only days before the meeting. Other central banks, from Iceland to India, have resorted to massive hikes in a bid to curb inflation, which is now at the highest level in decades in many economies after sharp increases in the cost of energy and food.

In continental Europe, the Swiss National Bank unexpectedly raised interest rates by 50 basis points to minus 0.25 percent, while the Czech National Bank raised borrowing costs by 125 basis points to 7 percent earlier this week.

However, unlike most other economies in North America and Europe, interest rate hikes in Norway are unlikely to increase the prospect of a recession.

Norway is Western Europe’s largest oil producer and is experiencing an economic boom, with the central bank noting that unemployment was “very low” and that there was little spare capacity.

That boom meant that last year Norges Bank became the first major western central bank to raise interest rates after the start of the Covid-19 pandemic. Growth is expected to remain strong this year at 3.5 percent, although this latest central bank estimate is lower than forecasts made earlier in 2022.

Most economists in Norway had expected a smaller increase, as the country had started its tightening cycle early. Since more than 90 percent of mortgages have a variable interest rate, the impact of higher policy rates also has a faster and more direct impact on the economy than elsewhere.

But Norges Bank sounded the alarm over the prospect of even higher inflation, arguing that, given Norway’s tight labor market, unemployment was likely to remain low.

“Underlying inflation has risen rapidly and has come in higher than expected. With rising wage growth and inflation of imported goods, there are prospects that inflation will remain above target for quite some time,” it added.

Norges Bank said it would likely raise rates at its next meeting in August and indicated that rates could be 2.25 percent by the end of the year and 3 percent by next summer.

Economists at Nordea, Scandinavia’s largest lender, called the increase “somewhat surprising”, adding: “A prospect of longer inflation is the main reason for this aggressive move by Norges Bank.”

Norway is receiving record revenues from oil and in particular gas while other European countries are looking for an alternative to Russian petroleum. The economy also benefits from regular inflows from the world’s largest $1.2 trillion sovereign wealth fund.

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