Why Norway's central bank keeps raising interest rates
Interest rates in Norway are at their highest level since 2008, with the central bank of Norway, Norges Bank, expected to keep raising rates into the autumn.
The key interest rate in Norway is 3.75 percent after a recent rate hike of 0.5 percentage points from Norges Bank, the country's central bank.
For consumers, this translates to interest rates of between four and five percent on loans and mortgages.
The key policy rate has been raised by more than 2.5 percentage points over the past year. Furthermore, Norges Bank will continue raising interest rates throughout the year.
Marius Gonsholt Hov, the chief economist at the financial institution Handelsbanken, believes that the interest rate peak of around 4.5 percent shouldn't be ruled out. Meanwhile, the central bank predicts a peak of 4.25 percent
Norges Bank has been raising interest rates since 2021 from historically low levels to try and slow down the economy from overheating and to bring down inflation in line with targets.
"If we do not raise the interest rate, prices and wages can continue to rise rapidly, and inflation will take hold. Then it can be more expensive to bring price inflation down again," central bank governor Ida Wolden Bache said when rates were raised earlier in June.
The central bank has set an inflation target of two percent. Inflation in Norway between May 2022 and the same month this year was measured at 6.7 percent, according to figures from national data agency Statistics Norway.
READ MORE: Norway's latest interest rate pushes consumers near 'breaking point'
"Norges Bank's task is to ensure low and stable inflation. The goal is a price increase that is close to two percent over time. At the same time, we must contribute to ensuring that as many people as possible are in work and to stable economic development over time," the bank has said of its targets.
With inflation well above targets, the interest rate will keep rising. Norges Bank has already abandoned its initial predicted interest rate peak of three percent due to higher-than-forecasted inflation.
What is causing inflation?
Increasing food costs, rising rents, and more expensive flights are some of the key drivers of increased inflation in Norway. The price of food in Norway has increased by 13.2 percent since last May, the highest yearly increase since the early 1980s.
Additionally, other factors, such as a weak krone, have contributed to inflation in Norway.
"The exchange rate for the Norwegian kroner has weakened a lot over the past year, and lately, the krone has been weaker than expected. A weaker krone means that the goods we buy from abroad become more expensive in Norwegian kroner. At the same time, there is a prospect that wage growth this year will be higher than we had imagined. This will lift price growth going forward," the bank has said.
Why does the central bank believe interest rates will curb inflation?
Essentially, the reasoning is that higher interest rates slow economic activity and consumption. This is because higher rates mean less disposable income for those with loans and mortgages.
"For those who have loans, higher interest costs come on top of the fact that many goods and services have become more expensive. For some time to come, many people will have tighter finances, and some will probably have to reduce consumption. For some, it will be demanding. But by raising the interest rate, we contribute to the reduction in price inflation, and to the purchasing power being able to increase again," Norges bank writes on its website.
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The key interest rate in Norway is 3.75 percent after a recent rate hike of 0.5 percentage points from Norges Bank, the country's central bank.
For consumers, this translates to interest rates of between four and five percent on loans and mortgages.
The key policy rate has been raised by more than 2.5 percentage points over the past year. Furthermore, Norges Bank will continue raising interest rates throughout the year.
Marius Gonsholt Hov, the chief economist at the financial institution Handelsbanken, believes that the interest rate peak of around 4.5 percent shouldn't be ruled out. Meanwhile, the central bank predicts a peak of 4.25 percent
Norges Bank has been raising interest rates since 2021 from historically low levels to try and slow down the economy from overheating and to bring down inflation in line with targets.
"If we do not raise the interest rate, prices and wages can continue to rise rapidly, and inflation will take hold. Then it can be more expensive to bring price inflation down again," central bank governor Ida Wolden Bache said when rates were raised earlier in June.
The central bank has set an inflation target of two percent. Inflation in Norway between May 2022 and the same month this year was measured at 6.7 percent, according to figures from national data agency Statistics Norway.
READ MORE: Norway's latest interest rate pushes consumers near 'breaking point'
"Norges Bank's task is to ensure low and stable inflation. The goal is a price increase that is close to two percent over time. At the same time, we must contribute to ensuring that as many people as possible are in work and to stable economic development over time," the bank has said of its targets.
With inflation well above targets, the interest rate will keep rising. Norges Bank has already abandoned its initial predicted interest rate peak of three percent due to higher-than-forecasted inflation.
What is causing inflation?
Increasing food costs, rising rents, and more expensive flights are some of the key drivers of increased inflation in Norway. The price of food in Norway has increased by 13.2 percent since last May, the highest yearly increase since the early 1980s.
Additionally, other factors, such as a weak krone, have contributed to inflation in Norway.
"The exchange rate for the Norwegian kroner has weakened a lot over the past year, and lately, the krone has been weaker than expected. A weaker krone means that the goods we buy from abroad become more expensive in Norwegian kroner. At the same time, there is a prospect that wage growth this year will be higher than we had imagined. This will lift price growth going forward," the bank has said.
Why does the central bank believe interest rates will curb inflation?
Essentially, the reasoning is that higher interest rates slow economic activity and consumption. This is because higher rates mean less disposable income for those with loans and mortgages.
"For those who have loans, higher interest costs come on top of the fact that many goods and services have become more expensive. For some time to come, many people will have tighter finances, and some will probably have to reduce consumption. For some, it will be demanding. But by raising the interest rate, we contribute to the reduction in price inflation, and to the purchasing power being able to increase again," Norges bank writes on its website.
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