Economy For Members

Weak krone and high inflation: Why Norway's interest rate will keep rising

Author thumbnail
23 Mar, 2023 Updated Thu 23 Mar 2023 14:02 CEST
Weak krone and high inflation: Why Norway's interest rate will keep rising
Here's why interest rates in Norway will continue to rise in 2023. Pictured is various currencies. Photo by Ibrahim Boran on Unsplash

Norway's central bank, Norges Bank, raised the key policy rate on Thursday. The financial institution has said it will keep raising the policy rate thanks to a weak krone and inflation.


Norges Bank, the central bank of Norway, has set the key policy rate in Norway at three percent after announcing an increase of 0.25 percentage points.

The bank sees interest rates as a tonic to curb rising inflation in Norway. Inflation in Norway is currently 6.3 percent over the past 12 months.

"The committee's assessment is that a higher interest rate is needed to curb inflation. The price increase is clearly above the target. Growth in the Norwegian economy is slowing, but activity is still high. The labour market is tight, and wage growth is on the rise," the announcement of the increase reads.

Additionally, the bank said it would keep increasing interest rates beyond the three percent mark, which had been its initial target for the key policy rate in Norway. Meanwhile, Norges Bank said it would probably raise the interest rate again in May.

Several analysts and experts predict that the key interest rate will be raised to somewhere between 3.5 percent and 3.75 percent.


The country's largest employer organisation, the Confederation of Norwegian Enterprise (NHO), has welcomed the increase and said it's a necessary measure against inflation.

"Various estimates indicate that it will take time to bring inflation back down to the target. That is why it was right for Norges Bank to raise the interest rate now," Øystein Dørum, chief economist for the NHO, told the Norwegian news wire NTB.

Another factor which could drive up interest rates is the weak krone. A weak krone itself contributes to increased inflation as it makes the cost of importing goods more expensive.

"Let me emphasise that the forecasts are just that - forecasts - and not a promise. If the krone becomes weaker than assumed, or the pressure in the economy persists, a higher interest rate than we currently estimate may be needed to bring inflation down towards the target," Ida Wolden Bache, governor for the bank, said in the rates announcement.

Several factors are currently contributing to the weak krone, which is down significantly compared to the euro, dollar and pound since the new year, among them are lower interest rates in Norway compared to the Eurozone and the US.

"In the last year, interest rates abroad have risen more than in Norway. Together with unrest in the financial market, this has probably contributed to the weakening of the krone exchange rate. The krone is significantly weaker than we imagined in December," Wolden Bache said of the krone.

Lower interest rates make the krone a less enticing investment compared to currencies from countries with higher interest rates.

Therefore, despite the krone being free-floating (meaning it isn't tied to anything, and the central bank tries not to intervene), interest rates may need to be increased to strengthen its position. In the past, higher interest rates in Norway have actually helped to keep the krone strong.


Increasing the strength of the krone through interest rate hikes should also have the impact of curtailing inflation.

How will this affect me?

According to the Norwegian Association of Estate Agents, increased interest rates could put Norway at the tip of a house-building iceberg.

"The sale of new homes is now at financial crisis levels, and the pace of starts is plummeting. We have previously warned that the combination of high imported construction costs and too sharp a rise in interest rates could trigger a housing recession, with spillovers to the economy as a whole. Now we are there," Carl O. Geving of the association told the Norwegian newswire NTB.


Another factor is the more expensive loan and mortgage repayments for consumers in Norway.

"With this interest rate increase, a normal mortgage of 2 million kroner has become 35,000 kroner more expensive in a year, or around 2,900 kroner a month," Carsten Henrik Pihl from the Homeowners Association told NTB.

Phil advised that those looking for a reasonable rate from a bank should expect to pay around 4.5 percent.

Those on a flexible rate mortgage or loan, can always look at the possibility of switching to a fixed rate deal to shield against future hikes.


Join the conversation in our comments section below. Share your own views and experience and if you have a question or suggestion for our journalists then email us at [email protected].
Please keep comments civil, constructive and on topic – and make sure to read our terms of use before getting involved.

Please log in to leave a comment.

See Also