Norway hikes rates, in rare example of monetary tightening

[March 21, 2019]  By Nerijus Adomaitis and Terje Solsvik

OSLO (Reuters) - Norway's central bank raised its main interest rate on Thursday, as expected, and said its next hike may come earlier then previously planned, strengthening the crown currency against the euro.

The bank raised its key policy rate to 1.0 percent from 0.75 percent previously, in line with the forecast of 23 out of 26 economists in a Reuters poll.

Norges Bank's approach stands in contrast to those of the U.S. Federal Reserve, the European Central Bank and others in Europe, which are keeping rates on hold due to rising uncertainty about the prospects for the global economy.

"Our current assessment of the outlook and balance of risks suggests that the policy rate will most likely be increased further in the course of the next half-year", said Governor Oeystein Olsen.

"The rate path shows a greater probability of a rate hike than of an unchanged rate in June," he added.

The new rate path shows the bank sees rates averaging 1.1 percent in 2019, against 1.0 percent seen previously, and 1.6 percent in 2020, against 1.4 percent before.

Following the unanimous decision, Norway's currency, the crown, surged over one percent against the euro to trade at 9.6010 at 0913 GMT and was pushing toward its biggest one-day gain in over a year.

"As expected Norges Bank hiked the key rate today. The rate path was lifted in the front and indicates the next hike already at the June meeting," Nordea Markets analyst Joachim Bernhardsen said in a note.

: A general view of the Norwegian central bank in Oslo, Norway March 6, 2018. REUTERS/Gwladys Fouche

Oil-rich Norway stands alone among other developed economies in tightening monetary policy, thanks to rising crude prices and higher-than-anticipated economic growth and inflation.

On Wednesday, the U.S. Federal Reserve brought its three-year drive to tighten monetary policy to an abrupt end, abandoning projections for any interest rate hikes this year amid signs of an economic slowdown, and saying it would halt the steady decline of its balance sheet in September.

On Thursday, the Swiss National Bank kept in place its ultra-loose monetary policy, as anticipated by economists, and later in the day the Bank of England is also expected to announce unchanged rates amid continued uncertainty over Brexit.

Norges Bank raised its growth forecasts for 2019 and 2020 while predicting a sharper slowdown in the two following years, from 2.7 percent expansion this year to just 1.1 percent growth in 2022.

"How to balance global vs domestic factors? Front-load rate hikes in the path and take a wait-and-see approach regarding the long-end. Well done Norges Bank!" tweeted Erica Blomgren, fixed income strategist at SEB.

(Editing by Gwladys Fouche and Toby Chopra)

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