Lone Hawk Norges Bank Stuns Markets With Signal on Rates

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Norges Bank is busy building a reputation as one of the world’s most hawkish central banks as it delivers its third interest-rate hike since September and signals there’s more to come.

Governor Oystein Olsen said that, given the “balance of risks,” the key rate “will most likely be increased further in the course of 2019,” in a statement on Thursday. The deposit rate was raised by a quarter point to 1.25%, as expected.

The krone surged 1% against the euro, its strongest gain since March. Against the dollar, the krone was up about 1.5%.

The decision, and the forward guidance, makes Norges Bank “the sole hawk in town,” Kristoffer Lomholt, a senior analyst at Danske Bank, said in a tweet. Thursday’s announcement suggests that “the next hike more likely than not will come already in September,” while rates markets had priced Thursday’s increase “as the final hike in the cycle,” which explains the “big market reaction,” he said.

Norges Bank also said that its “policy rate forecast indicates a slightly faster rate rise in the coming year than projected in the March Report, but the policy rate path is little changed further out.”

Norway’s economy, which is backed by the world’s biggest sovereign wealth fund, is starting to show signs of overheating after a surge in oil investments. With the economy running at full speed, the central bank has made clear there’s no room for the kind of extreme monetary stimulus that’s dominated since the global crisis of 2008. The message is very different from that of the European Central Bank and the Federal Reserve, which have both embraced continued stimulus.

“While most other central bankers are discussing rate cuts or new quantitative easing programs amid weaker global growth and political uncertainty, Norway’s central bank is raising its rates for the third time within a year!” Frederik Engholm, chief strategist at Nykredit, wrote in a tweet.

ECB, Fed

On Tuesday, ECB President Mario Draghi sent bond yields plunging across Europe, as he told markets that additional stimulus will be needed “in the absence of any improvement” to the outlook for growth and inflation.

On Wednesday, the Federal Open Market Committee said that, in light of increased uncertainties and muted inflation pressures, it “will closely monitor the implications of incoming information for the economic outlook and will act as appropriate to sustain the expansion.”

In Norway, meanwhile, unemployment has stabilized below 4% and inflation is running above target. And thanks to a weak krone, the central bank has room to raise rates without hurting exports.

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“Growth in the Norwegian economy is solid, and capacity utilization is estimated to be somewhat above a normal level,” the bank said. “Underlying inflation is a little higher than the inflation target.”

“At the same time, trade tensions are a source of substantial global uncertainty,” it said. “Uncertainty surrounding the effects of monetary policy suggests a cautious approach to interest rate setting. The overall outlook and balance of risk suggest that the policy rate be increased somewhat further.”

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