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Norway Announces 50 Basis Point Hike to Interest Rates, Largest for 20 Years

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  • The bank's Monetary Policy and Financial Stability Committee voted unanimously in favor of the 50 basis point hike, double the level broadly expected by economists.
  • The move takes the policy rate from 0.75% to 1.25%, and Norges Bank Governor Ida Wolden Bache said in a statement that it will likely be raised further to 1.5% in August.

Norway's central bank announced a 50-basis-point hike to its benchmark interest rate on Thursday, the country's largest single increase since 2002.

The move takes the policy rate from 0.75% to 1.25%, and Norges Bank Governor Ida Wolden Bache said in a statement that it will likely be raised to 1.5% in August.

The bank's Monetary Policy and Financial Stability Committee voted unanimously in favor of the rate rise, which was double the level broadly expected by economists.

The committee said in a statement that a "markedly higher" policy rate is needed to stabilize inflation around the Norges Bank's target of close to 2%. Norwegian consumer price inflation came in at a 13-year high of 5.4% year-on-year in April, significantly above expectations.

Governor Wolden Bache told CNBC on Thursday that a tight labor market means employment will likely remain high even with higher interest rates.

"Prospects for a more prolonged period of high inflation suggest we need to raise policy rates and to raise policy rates faster and by more than envisaged in March," she said.

"A faster rate rise now will reduce the risk of inflation remaining high and the need for a sharper tightening of monetary policy further out," she added in an earlier statement

The committee said it was concerned about inflation moving faster than anticipated against the backdrop of "little spare capacity in the Norwegian economy," along with sustained global inflationary pressures and the weakened Norwegian krone currency.

The terminal rate is now expected to rise to around 3%.

Last week, the U.S. Federal Reserve hiked its benchmark rate by 75 basis points, while the Swiss National Bank surprised the market with a 50 basis point hike, its first since 2007, and the Bank of England implemented a fifth consecutive 25 basis point increase to its bank rate.

"International inflation pressures and higher international interest rates do affect policy in Norway, both through the direct effect on our imported inflation but also through the exchange rate," Wolden Bache told CNBC.

"So higher interest internationally in isolation pull in the direction of a weaker krone, which also influences price prospects here in Norway, so that has contributed to the lifting of our rate path."

In a research note Thursday, Goldman Sachs said the 50 basis point hike represented a "catch-up" for the central bank's pause in May, but suggested the Norges Bank's preferred tightening pace would be for 25 basis point increments.

The Wall Street giant brought forward its projected tightening path and raised its terminal rate estimate accordingly, and now expects 25 basis point hikes at every meeting until May next year, when the policy rate reaches 3%.

"We see risks skewed towards a faster hiking cycle should wage growth continue to strengthen and inflation continue to surprise to the upside," Goldman analysts said.

"Should Norges Bank hike by 50bp, we would expect this to happen in September, given the Committee's strong guidance for a 25bp August hike. Given Norges Bank's prior forward guidance reliability, we see a high bar to renege on that guidance in August."

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