For the first time in seven years, the central bank in Norway increased interest rates as the policymakers in the wealthiest economy in Scandinavia have begun the process of letting go of the record stimulus set up to handle the impact of the horrible oil crisis in a generation. Norges Bank increased the benchmark rate by a quarter point to 0.75 percent, a confirmation of the prediction done by twenty-three economists interviewed by Bloomberg before the decision was taken. Norges Bank said it would increase rates again by the beginning of the next year, but also surprisingly reduced its longer-term projections. As at 11:03 am, the krone fell one percent to 9.6418 per euro.
Norway’s Central Bank Governor, Oystein Olsen said there are restrictions to how fast rates can be raised by the central bank at a press conference, as he mentioned the krone and developments abroad as crucial factors.
Since June, the tightening process had been flagged and came at a time that the economy of the largest oil producer in Western Europe is getting close to capacity with an unemployment rate less than four percent, increased crude oil prices, and the inflation rate moving to its target position. However, the trading of the krone close to record lows has given Olsen and his team extra opportunity to increase interest rates.
Based on a comparison between the Norwegian central bank, and its contemporaries in Frankfurt and Stockholm, it is noteworthy that the Norwegian central bank is starting on a swifter exit from record stimulus than others. Supported by record fiscal stimulus from the wealth fund of the nation valued at $1 trillion, there is no need for Olsen to reduce rates as much as it is done in other places, and he did not make use of traditional policies like the purchase of bonds.
The nation’s offshore industry has been revived with the increase in the prices of crude oil this year; this has also enabled the government to start the process of saving money into the wealth fund for the first time since the latter part of 2015. This will be the first time the benchmark rate will rise up for most borrowers. The surge could signify an increased mortgage costs as most of the loans in Norway are closely tied to the three-month interbank lending rate, serving as a test for the housing market which has been improving after austere lending policies created a plunge in 2017. The bank said the doubts surrounding the impacts of greater interest rates insinuate a careful approach to the setting of interest rate.
Due to the domestic demand situation, the rate path was reduced after labor market developments and economic growth have been floppier than anticipated. Wage growth is expected to be weaker than its earlier estimate. The weaker krone and the increased oil prices have pulled the path in the opposite direction.
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