MNI INTERVIEW: Norges Bank Hike Not Just About Oil - Governor

Norges Bank’s 25-basis-point rate hike on Thursday was driven by domestic factors as well as by higher oil prices, Governor Ida Wolden Bache told MNI, steering away from precise guidance as to whether and when another hike might come.

While Norges Bank stated that its previous forecast of a peak in rates between the present level of 4.25% and 4.5% still holds, Wolden Bache made clear that she had no wish to risk a repeat of the criticism incurred by Norway’s central bank last year when it wrong-footed market participants with meeting-specific guidance.

"We take account of the risk that if we are too precise about what we will do at a specific meeting, that that can be to a large extent interpreted as a promise, the markets put too much emphasis on that," she said in an interview.

Analysts were split before Thursday’s decision over whether it would tighten now or wait until June to do so, and Norges Bank’s current communications policy means they are likely to be left in suspense again over the likelihood and possible timing of another hike this summer.

"The risk that something is interpreted as a promise is, of course, something we do want to avoid in a situation where uncertainty is unusually high," Wolden Bache said.

NOT ALL ABOUT OIL

While other central banks, such as the Bank of England, were on a rate-cutting path before the Iran war, Norges Bank was already wrestling with stubbornly-above-target inflation, and now it foresees no rapid return to pre-conflict energy market conditions. (See MNI INTERVIEW: Policy Restrictive, Hikes Coming - Norges Bank)

"We have seen volatility in oil prices since our last meeting. Oil prices have remained elevated, and if you look at the future prices, they will come down, but they will remain above where they were before the war for some time ahead, and that's what the committee is basing its assumptions on. So we do expect that this will have some effect on other raw material prices, commodity prices that could have effects on domestic inflation as well," Wolden Bache said.

"But the decision to raise the interest rate today and the reason for the upward revision of the interest rate forecast in March were not solely due to higher international pricing pressures, but were related to the fact that inflation has been higher than expected. Wage growth this year is higher than we previously expected, and this comes on top of the fact that inflation now has remained above target for several years," she said.

The impact of higher energy prices and domestic factors such as higher wage settlements "are not easy to separate," she noted. (See MNI INTERVIEW: Global Competition Caps Norway Wages-Stats Head)

CREDIBILITY

Norges Bank was also determined to maintain the credibility of its inflation objective, with its target inflation measure still a full percentage point above the 2% goal in its most recent reading.

"Our assessment is that the inflation target is credible. What we are saying is that that credibility cannot be taken for granted. This is something that financial markets take as given, that we will in fact react when there is a risk that inflation will become high, and if they stop believing that we risk a currency depreciation and further price increases which could make inflation harder to bring down again," she said.

While other central banks have published scenarios with different paths for oil prices, Norges Bank has so far stuck to emphasising its central scenario while discussing the risks around it. It has not indicated what it will do in its next quarterly forecast round, but its messaging instead is centred on credibility and the case for not delaying faced with an inflation overshoot.

"We do believe that there is credibility and that markets have confidence in the inflation target and that is what we have seen in the market reaction," Wolden Bache said.