First Norwegian Rate Hike in a Year

May 12, 2011

The Executive Board of the Norges Bank raised its key policy rate to 2.25% from 2.0%.  Three earlier hikes of 25 basis points each were implemented in October 2009, December 2009 and May 2010.  The key rate remains 350 basis points lower than its pre-October 2008 cyclical peak of 5.75%.  According to a statement released today by monetary authorities, the rate increase constitutes another step in a gradual normalization of rates and is being taken now because the recovery is on a “firmer footing” with capacity usage rising and inflation likely to pick up in the future.  The statement is not a particularly hawkish one in tone, however, noting that because of  strong krone and since core inflation of 1.25-1.5% remains well in check, interest rates “should be kept low.”  It is isn’t clear that another rate increase will occur after the next Executive Board meeting on June 22.  The statement fails to cite reasons why further tightening could be deferred for longer, but in the central bank’s March statement the following factors were postulated and still presumably will serve as guidelines governing the timing of a fifth increase: a marked slowdown in world economic growth, heightened financial turbulence abroad or a further appreciation of the krone.

Copyright Larry Greenberg 2011.  All rights reserved.  No secondary distribution without express permission.

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