(Bloomberg) -- Norway’s central bank is sticking with one of the rich world’s most hawkish monetary policy stances, dashing investor bets that it would advance plans for a first cut in borrowing costs as soon as this year.
In their decision in Oslo published on Thursday, officials preoccupied with the weakness of the krone kept their deposit rate at 4.5%, the highest since December 2008, and declared that there’s little prospect of a reduction before the initial quarter of 2025.
Coming in the wake of the Federal Reserve’s decision on Wednesday to start easing with a close-run half-point rate cut, Norway’s steady position contrasts with most peers who are loosening constriction on their economies as the global inflation shock fades.
“The policy rate will likely be kept at 4.5% to the end of the year,” Governor Ida Wolden Bache said in a statement on Thursday. “We believe that there is a need to keep the policy rate at today’s level for a period ahead but that the time to ease monetary policy is approaching.”
Expectations that Norges Bank will be slower than its peers to normalize policy boosted the Norwegian currency, which gained as much as 1.1% against the euro and traded at its strongest levels in almost three weeks.
The krone is still the worst-performing G-10 currency this year, down almost 3% versus the dollar and close to 4% against the euro, due to a sharp drop in demand for riskier assets in August along with falling oil prices.
Before the decision, investors observing a shifting environment toward global loosening had priced in a full 25 basis-point rate reduction as soon as December, but pared those bets to 13 basis points after the announcement. Instead, Norges Bank is likely to be among the last advanced-world central banks to cut borrowing costs in the current cycle.
“Norges Bank is not joining the Western rate-cutting bandwagon as they firmly signal, again, that we should not expect a rate cut this year,” Kjetil Martinsen, chief economist for Norway at Swedbank AB, said in a note. Despite inflation “running lower than Norges Bank’s projections for almost a year already, this has not swayed the bank to frontload rate cuts, remaining the last hawk in Europe and underscoring the sensitivity to a weak and volatile krone.”
The Norwegian institution’s efforts to rein in price growth have been hampered primarily by the krone. Officials warned that deeper declines for the currency could even require tighter policy.
“We put weight on the fact that we have seen a currency depreciation historically that has had a tendency of raising inflation in Norway and also that the high wage growth combined with weak productivity growth will restrict the future disinflation,” Wolden Bache said in an interview. Weakening of the krone still remains “a potential upside risk” for the interest rate outlook, she said.
SEB AB’s strategists Marthe Enger Eide and Amanda Sundstrom postponed their forecast of the first rate cut to March 2025, from December this year, citing “clear” guidance from Norges Bank.
Core price growth has consistently undershot Norges Bank’s estimates, slowing for the 10th straight month in August, to 3.2%. A survey by Norges Bank also confirmed last week that the fossil-fuel-rich economy is likely to expand less than seen earlier, even as pressures in the labor market aren’t easing.
The central bank now expects the mainland economy to grow at a slower rate than previously projected, forecasting expansion of 0.6% this year and 1.1% in 2025. It sees both headline and underlying price growth remaining above its 2%-target at the end of its outlook horizon in 2027, at 2.4%.
The Norwegian decision is just one moving part in a pivotal week for central banks. Aside from the Fed rate cut, Brazilian officials raised borrowing costs for the first time since 2022.
Later on Thursday, the Bank of England may give clues on its next easing step, and South African policymakers will probably cut. On Friday, the Bank of Japan will deliver its first rate judgment since its hike at the end of July sowed the seeds of a global selloff.
--With assistance from Gina Turner, Naomi Tajitsu, Joel Rinneby, Stephen Treloar, Alastair Reed, Anton Wilen, Niclas Rolander, Christian Wienberg and Zoe Schneeweiss.
(Updates with governor comments in tenth paragraph)
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