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Fast Comment NorwayNorges Bank hikes policy rate but lowers policy rate path

  1. Policy rate hiked to 1.5 percent, with a 40 percent probability of another hike next year
  2. Solid domestic economy, but weaker foreign factors and domestic inflation trend
  3. The policy rate has now finally reached its peak
Policy rate hiked to 1.5 percent, with a 40 percent probability of another hike next year
Norges Bank today raised the policy rate by 25 basis points to 1.5 percent. We had expected the central bank to keep the policy rate unchanged at 1.25 percent, which was also the consensus expectation. That said, there was considerable division among analysts ahead of the decision this time. Despite raising the rate today, the central bank’s new policy rate forecast is now actually lower compared to the forecast from June. Technically, there is a likelihood of around 40 percent that the policy rate will be lifted one more time, a move that could occur as soon as March next year. However, according to the board of Norges Bank, the policy rate will probably remain "at this level in the coming period". In other words, the policy rate has most likely reached its peak at 1.5 percent, the way the central bank sees it.
Solid domestic economy, but weaker foreign factors and domestic inflation trend
To justify the policy rate hike today, the central bank cited solid growth in the domestic mainland economy and inflation close to the target. It also said that a higher policy rate could mitigate the risk of a renewed acceleration in debt growth and house price inflation. At the same time, Norges Bank now saw the Norwegian labour market as less tight than before, and the inflation trend also seemed weaker than Norges Bank had expected in June. In addition, weaker growth prospects abroad as well as lower international interest rates had contributed to the lowering of the central bank’s forecast for the policy rate.
The policy rate has now finally reached its peak
In Norges Bank's new policy rate forecast, the policy rate reaches its peak next year at 1.6 percent, but then falls to 1.53 percent by the end of 2022. As mentioned above, this implies a likelihood of around 40 percent that the policy rate will be hiked to 1.75 percent next year, and it could happen as soon as March. However, the likelihood of another hike is sufficiently low for the central bank to say that the policy rate "most likely" will remain at 1.5 percent. We also believe that the policy rate now finally has reached its peak in this economic cycle.


Source: Macrobond

Disclaimer

Kari Due-Andresen

Chief Economist Norway

Norway and UK

kadu01@handelsbanken.no

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