The Monetary Policy and Financial Stability Committee Norges Bank made a unanimous decision to raise the main interest rate from 0,75 to 1,25 percent.
- Now when we assess the outlook and the risk picture, the key interest rate will most likely be raised to 1,5% in August, says central bank governor Ida Wolden Bache.
The Norwegian economy is very active and has little spare production capacity. Unemployment has decreased more than expected and is at a very low level. Inflation clearly above target. Core inflation rose sharply and was higher than expected. Along with rising wage growth and higher growth in prices of our imported goods, there are prospects that inflation will remain above the target for some time.
Inflation clearly above target
Home interest rate is still at a low level and monetary policy is expansionary. In the Committee's assessment, a significantly higher interest rate is needed to stabilize inflation around the target. A tight labor market means employment is likely to remain high even if interest rates rise in the future.
– The prospect of continued high inflation in the longer term indicates that it will become faster increase in interest rates than previously estimated. A faster increase in interest rates now will reduce the risk that inflation will remain high and that there will be a need for a stronger tightening of monetary policy later, says the president of the central bank, Ida Wolden Bache.
The interest rate may rise more
When discussing the risk picture, the committee was concerned that the low spare capacity in the Norwegian economy, sustained international price pressures and the weaker koruna could lead to higher-than-expected inflation. Then the interest rate may rise more than we currently expect. On the other hand, there is also a risk that rapid increases in interest rates abroad will lead to a sharp slowdown in growth and that international price pressure is easing faster than expected. A hike in interest rates here in the country may also provide for a greater than expected weakening in the housing market and household consumption. Should inflation and capacity utilization decline faster than expected, interest rates may be raised less.
The forecast for the main interest rate is higher than in the previous monetary policy report and means the interest rate will increase to around 3 percent next summer.
Source: Norges Bank
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