Norway's Central Bank has raised its key policy rate by 50 basis points to 3.75% in a bid to curb inflation, setting its sights on yet another hike in August.
This baffled analysts, who, prior to the announcement, were split on whether the key policy rate would be hiked by 50 basis points or 25 basis points, but the majority nevertheless bet on a smaller hike.
This move raises the policy rate to its highest level since the outbreak of the global financial crisis of 2008. With that in mind, the Central Bank itself predicted the policy rate would rise further to 4.25% during the autumn.
"If we do not raise the policy rate, prices and wages could continue to rise rapidly and inflation become entrenched," Norges Bank Governor Ida Wolden Bache said in a statement.
Inflation is currently well above the central bank’s initial target of 2%, reaching 6.7% in May 2023.
Even though Norway in 2021 was among the first Western nations to elevate the key rates after the COVID-19 pandemic, its pace of tightening has since fallen behind the eurozone and its Nordic neighbors, thereby affecting the nation's currency. The historically weak and struggling krone has repeatedly been blamed on Norway's interest rates, which are lower than Europe's.
The latest hike pushes Norwegian interest rates above the key policy rate in Sweden and the European Central Bank (both 3.5 %). However, the US key policy rates are still higher (at 5-5.25%).
A weak krone has been dominating headlines in Norway in recent months, with the currency down significantly against both key currencies such as the dollar, the pound and the euro and even the Swedish krona and the Danish krone.
While making Norwegian exports more attractive (namely oil, gas and farmed fish topping the list), over time a weak krone can lead to higher inflation as imported products become pricier. Meanwhile, real wage growth in Norway is at its lowest since the 1980s. More drastic wage hikes are also unlikely, because a prospect like this is bound to fuel inflation further.