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Weak krone and inflation to lead to higher interest rates in Norway

Frazer Norwell
Frazer Norwell - [email protected]
Weak krone and inflation to lead to higher interest rates in Norway
High inflation and a weaker krone will likely to higher interest rates in Norway. Pictured is Oslo's skyline. Photo by Marian Rotea on Unsplash

A combination of rising prices and a weak krone mean Norway’s central bank will likely raise the key policy interest rate beyond its initial targets, leading economists warned Friday. 

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Norway’s key policy rate is currently set at 2.75 percent by Norway’s central bank, Norges Bank. The fiscal institution set an initial target of three percent for interest rates. 

Following historically low rates, the bank has moved to increase interest rates rapidly over the past two years to try and curb rising inflation. 

A key policy rate increase scheduled later in March was set to see the central bank reach its target of three percent. However, a weakened krone and inflation continuing to rise means that Norges Bank may choose to take the policy rate beyond its initial targets. 

Between February 2023 and the same month the year before, Norway’s consumer price index (CPI) was 6.3 percent. Additionally, the Norwegian krone has weakened considerably over the last few months. 

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A weak krone further compounds inflation as it causes imports to be more expensive, which pushes up the cost of consumer goods. 

Both of these factors are why experts believe why the key policy rate will be raised well beyond three percent by Norges Bank. 

“We are completely confident that the interest rate peak will be higher than expected,” Kjetil Olsen, Nordea’s chief economist, told Norwegian broadcaster TV 2

Olsen predicted that Norges Bank would likely take the key policy rate to between 3.5 and 3.75 percent. In more real terms, a key policy rate of 3.75 translates to loan and mortgage rates of around five percent. 

Statistics Norway (SSB) has also predicted that interest rates will rise above three percent. However, they forecast more mild increases. This is because the national data agency believes that inflation in Norway may have reached its peak. 

“Now we are probably at a turning point. Inflation should decline sharply throughout the year, and unemployment should rise slightly from the unusually low level we have now,” Thomas von Brasch from Statistics Norway said of the latest inflation figures. 

The SSB’s lower forecasted increase of 0.5 percentage points is due to the fact that it believes that the central bank will wish to prevent economic development from being dampened by rising interest rates. 

READ ALSO: What does the weakened Norwegian krone mean for you?

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