Nordea economists Kjetil Olsen and Sara Midtgaard argue that much higher Norwegian inflation and an energy price shock will force Norges Bank to tighten further. They expect the key rate to be raised to 4.25% in June, and see a higher probability that it reaches 4.5% rather than 4.0% by the end of 2026.
Higher inflation points to further tightening
“Inflation is much higher than Norges Bank has assumed and the energy price shock increases the inflation-burden further.”
“So far, the monetary policy committee has emphasized that they “do not want to restrain the economy more than needed to bring inflation down to target.” Based on recent developments there is obviously a question whether the economy is restrained, furthermore, at some point the committee has to discuss if they can “afford” to be as patient as they have.”
“We think that point is approaching and that they going forward will put a higher weight on bringing inflation down than so far. In other words, we think Norges Bank will put action to the words of the governor in her annual speech in February: “We will ensure that inflation is brought back to 2 percent.” While we are uncertain on the timing of such a shift, our main assumption is that Norges Bank will use the March meeting to prepare everyone for what is coming.”
“While a supply shock like this can lead to a conflict in the short term between the objective of keeping inflation stable around the target and the objective of keeping employment high and stable, according to Norges Bank’s own handbook of monetary policy it will normally imply some increase in the policy rate to ensure that inflation is brought down to target within a reasonable time horizon.”
“We therefore think Norges Bank will hike its key rate to 4.25% in June and also that there is a greater chance that the key rate is 4.5% than 4% by year end.”
(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)
Source: https://www.fxstreet.com/news/norges-bank-inflation-shock-drives-june-hike-nordea-202603161234
