Norges Bank Hikes Again as Riksbank Goes for Hawkish Hold

(Bloomberg) — Norway’s central bank increased borrowing costs for the second time this year, and said it’s primed to hike again if necessary to tame consumer prices, with its hawkish mood also echoed by neighboring Riksbank.

Norges Bank raised its key deposit rate on Thursday by a quarter point to 4.5% in a decision that had split economists. The outcome was predicted by 11 out of 21 forecasters in a Bloomberg survey, with the rest anticipating a hold.

Meanwhile, officials in Sweden kept their benchmark interest rate at 1.75%, the lowest level in the European Union, earlier on Thursday. The widely anticipated decision came with a message that a hike to interest rates this year is now more likely as the economy rebounds.

In Norway, the central bank’s outlook is for borrowing costs to remain close to their current level, staying higher for longer than they forecast in June, before eventually falling. Officials warned that they won’t be stuck to that path if price risks materialize.

“It will likely be necessary to keep the policy rate elevated for a time, and the Committee is prepared to raise the policy rate further if needed to bring inflation down to the 2% target within a reasonable time horizon,” Governor Ida Wolden Bache said in a statement.

What Bloomberg Strategists Say:

“Riksbank wasn’t remotely expected to be this hawkish all of a sudden, while Norges Bank’s willingness to tighten further took the markets off-guard. All told, this boosts the outlook for the Nordic currencies.”

— Ven Ram, cross-asset strategist. For more, click here and here.

The Norwegian krone was little changed versus the Swedish krona at 1.0450 at 12:44 p.m. local time, having hit 1.0524 last week, its highest since January 2023. Both currencies rose against the euro.

The result of Norway’s decision that had been laced with suspense chimes with the greater activism at present by global peers, with rate hikes delivered in recent weeks by the US Federal Reserve, the European Central Bank and the Bank of Japan. Officials in Oslo were frontrunners when they hiked in May. By contrast, earlier on Thursday the Swiss National Bank held its benchmark at zero.

Policymakers in Oslo acted to cool the economy of Europe’s largest energy exporter at a time when an uptick in business activity is in prospect, while underlying inflation has consistently exceeded their 2% goal since 2022.

Their move showed that officials considered evidence of improvement on that gauge of consumer prices to be insufficient to avert immediate tightening.

“Underlying inflation moderated and was lower than expected,” Wolden Bache said. “But the inflation outlook somewhat further ahead does not appear to have changed materially.”

Norges Bank’s challenges in its war with inflation are illustrated by the fact it raised consumer price forecasts through 2028, and now only sees price growth easing to its target by 2029. Commenting on the underlying drivers for inflation, Wolden Bache pointed out that wage growth projections are similar to those from June.

At the same time, “we have somewhat stronger international price impulses that feed into domestic inflation but also higher energy costs facing Norwegian firms pushing up inflation with the exchange rate working in the opposite direction,” she said in an interview.

The Norwegian hike and rate outlook come against a expectations for higher borrowing costs at Norges Bank’s key counterparts, Nordea Bank Abp’s Oslo-based chief economist Kjetil Olsen noted.

“Much higher rates expectations abroad also impacts rates at home and is an important reason why the rate path was lifted,” he said in a note to clients. “If Norges Bank had come out soft they could risk a weaker krone.”

He added that “rates will stay around current levels for quite some time and when rates eventually go down, they will not go down by much.”

In Sweden, officials said that if the outlook for inflation and economic activity remains unchanged, the increases in the policy rate will begin this year. In August, they had put the chance of a 25 basis-point hike in 2026 at 50%.

“The Riksbank is in a hiking mood,” Nordea’s chief analyst Torbjörn Isaksson said in a note to clients. “We maintain our forecast of a policy rate of 2.00% in November and 2.25% in February next year, which we expect to be the peak. Risks are tilted to earlier and more rate hikes.”

What Bloomberg Economics Says:

“The Riksbank’s guidance tilted sharply hawkish in September and pointed to a hike this year, reflecting mounting inflation pressure from the Iran war and a rapid pickup in domestic demand. More striking is what happens further out: the Executive Board’s communication suggests this isn’t merely about bringing one hike forward, but shifting the broader hiking cycle earlier. We now expect a November hike, followed by another move in March, taking the policy rate to 2.25%.”

— Selva Bahar Baziki, economist. For the full note, click here.

Traders now see a 91% chance of a Riksbank increase in two months’ time, compared with about 65% at the start of the week, with 35 basis points of tightening penciled in by year-end, according to overnight swaps. In Norway, the expectation is just 14 basis points this year.

Analysts at SEB AB and Svenska Handelsbanken AB both moved up their calls for the next hike to November.

“We are now signaling an interest-rate increase. But in a sense, this is an increase that comes for positive reasons — namely that growth is performing very well in Sweden,” Governor Erik Thedéen told reporters, adding that he expects the labor market to improve over time. “So this is an interest-rate increase occurring in an environment that is actually positive for Sweden.”

The largest Nordic economy returned to growth in the second quarter after government tax cuts on food and fuel in the lead-up to a general election helped household spending, along with low credit costs. At the same time, fears have persisted that inflationary pressure emanating from the Iran war may spike with energy supplies to Europe still restricted.

That rate path is “much more hawkish than expected” and indicates “a November rate hike is now the Riksbank’s base case,” chief strategist Claes Måhlén at Handelsbanken said.

–With assistance from Frances Schwartzkopff, Heather Burke, Naomi Tajitsu, Joel Rinneby, Anton Wilen, Christopher Jungstedt, Alastair Reed, Jonas Ekblom and Christian Wienberg.

(Updates with Wolden Bache and Thedéen comments, overnight swaps and analyst comments from 11th paragraph)

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