Breaking ranks, Norway signals 4 rate hikes by mid-2022

[June 17, 2021]  By Terje Solsvik and Victoria Klesty

OSLO (Reuters) - Norway's central bank said on Thursday it expected to raise interest rates four times by mid-2022 as the economy shakes off the effects of COVID-19, breaking ranks with the still ultra-loose policy outlook of counterparts in other developed nations.

A day after the Federal Reserve signalled U.S rates would probably rise from 2023 rather than 2024, Norges Bank's monetary policy committee kept its key rate unchanged at a record low 0.0% but said a hike was likely in September and others soon after.

"Given the rate path we see now, rates will be raised by 0.25% in (each of) the next four quarters," Governor Oeystein Olsen told a news conference.

Announced delays in vaccine deliveries to Norway in the third quarter did not "shift the big picture" on the economic recovery, he added in an interview with Reuters.

With many of the world's central banks laying the groundwork for a post-pandemic transition to life with less stimulus, the Fed on Wednesday also opened talks on how to end its crisis-era bond-buying.

Norges Bank looks set to be be the first of the G10 group of developed economies' central banks to raise the cost of borrowing, however, having previously signalled a hike this year.

Economists polled by Reuters had been almost evenly split over whether it that would happen in September or December.

But few had predicted two hikes by year-end.

In stark contrast, the Swiss National Bank on Thursday signalled monetary policy would stay ultra-loose for the foreseeable future, saying projected higher inflation was no reason to change course and citing a highly valued Swiss franc.

REAL ESTATE BOOM

Norway's currency, the crown, firmed to trade at 10.12 against the euro from 10.15 just before Norges Bank's policy announcement. It then fell back to 10.21.

Norway's Central Bank Governor Oeystein Olsen poses in his office at Norges Bank, Oslo, Norway February 13, 2020. NTB Scanpix/Hakon Mosvold Larsen via REUTERS ATTENTION EDITORS - THIS IMAGE WAS PROVIDED BY A THIRD PARTY. NORWAY OUT. NO COMMERCIAL OR EDITORIAL SALES IN NORWAY./File Photo

"In the light of today's hawkish message from Norges Bank, we will revise our policy rate forecast upward," economists at Handelsbanken wrote.

The central bank said the monetary policy committee's revised forecasts implied a slightly faster series of rate rises towards 2024 than in previous predictions issued in March.

Part of the reason behind the accelerated timetable is a rapidly recovering economy.

Norges Bank on Thursday held its forecast for GDP growth of 3.8% in 2021, but raised its prediction for next year to 4.1% from 3.4%.

Another factor is house price inflation, which has gathered pace since Norway cut rates three times last year to combat the impact of COVID-19, contributing to a property boom as borrowers took advantage of cheap credit.

While core inflation was expected to ease to 1.7% this year from 3.0% last year, below the central bank's 2% goal, it forecast house prices would rise by 9.2% in 2021 after expanding by 4.5% in 2020.

In a related statement on Thursday, Norway's finance ministry said it would force banks to hold more supplementary buffer capital, 1.5% of its balance sheet instead of 1%, boosting the system's solidity while making less capital available for lending.
 

(Additional reporting by Victoria Klesty and by John Revill in Zurich; Editing by Gwladys Fouche and John Stonestreet)

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