MNI INTERVIEW: Policy Restrictive, Hikes Coming - Norges Bank

Norwegian monetary policy remains restrictive despite above-target inflation and will tighten due to higher-than-expected price increases and war in the Middle East, the Norges Bank's governor told MNI, though she added that the timing of rate hikes will depend on economic developments."We do believe that monetary policy is restrictive. We really do believe that there's a need for a more restrictive monetary policy," Ida Wolden Bache said in an interview following the announcement of the Norges Bank’s unanimous decision to hold its policy rate at 4%.

Despite the Monetary Policy Report describing economic output as "close to potential," Wolden Bache noted that "we have seen weak developments in the interest-rate sensitive parts of the parts of the economy, while that has been compensated for by strong activity in other sectors, like the export sector, petroleum investment and also strong public demand."

Before this week’s meeting, the Bank had signalled the policy rate would be reduced in 2026. However, the new rate path implies rate hikes of 25 or 50 basis points by the end of the year.

"We have made the assessment that the news that we have had since our previous report indicates a need for a more restrictive monetary policy stance than previously mentioned," Wolden Bache said.

This is "due not only to the increase in energy prices following the war in the Middle East, but also on the back of higher-than-expected inflation numbers in Norway."

Although the committee voted unanimously for a hold in March, in line with market expectations, it discussed an increase in rates. The "committee's assessment was that it was prudent to wait and get more information on the inflation outlook."

When asked whether she agreed with Riksbank Governor Erik Thedeen that the lessons of the inflation shock in 2022 show that it is best not to delay tightening, she said that "we are not making any decisions now about what we will do at the coming meetings, and that will depend on economic developments." (see MNI INTERVIEW: No Hike Delay If Shock Lasts-Riksbank's Thedeen)

IMPLEMENTATION LAGS

The Norges Bank's Executive Director of Monetary Policy Ole Christian Bech-Moen has previously told MNI that the short fixing of floating-rate mortgages makes Norwegian households more sensitive to monetary policy than in many comparable countries, and Wolden Bache said "we take into account, of course, that many Norwegians have floating-rate mortgages, that that will have a quite immediate impact on household disposable incomes." (See MNI INTERVIEW: Norges Bank More Restrictive Than Implied By R*)

Still, the bank does not "have a new assessment or specific assessment about the implementation lag at the current juncture," she added, though "the fact that there are implementation lags means that we have to be forward-looking."

EXCHANGE RATE

The Monetary Policy Report noted the krone's appreciation since the December, saying that "in isolation, this will dampen inflation in Norway."

"We are very aware that the exchange rate exhibits ... high volatility," Wolden Bache said, but she noted that the Norges Bank’s forecasts "assume that the exchange rate will not move from the current level." 

"We believe that that's also a good forecast ... we haven't made any changes to that strategy now."