Norway Lifts Rates To 2.25%, Expects Smaller Hikes Ahead

Norway's central bank raised its benchmark interest rate by a widely-anticipated 50 basis points to 2.25% on Thursday, but said future hikes would be more "gradual", weakening the country's crown currency.

Norges Bank will probably hike again in November, by 25 basis points (bps), although predictions are unusually uncertain at the moment, its governor Ida Wolden Bache said.

"The rate forecast aligns with rate increases of 0.25 percentage points at the meetings in November, December and March," Bache told Reuters after Norges Bank's announcement.

The latest rise comes as central banks across the world battle soaring inflation. The U.S. Federal Reserve lifted rates by a third-straight 75 bps on Wednesday and signalled more large increases to come. Switzerland's central bank hiked by 75 bps on Thursday, while the Bank of England raised rates by 50 bps.

Norges Bank was the first major central bank to begin hiking rates in September 2021, and could now be the first to signal that the peak is near, analysts said.

GRAPHIC: Sustained hikes

The Norwegian policy rate, now at its highest since 2011, is currently set to peak at 3% next year and could start falling in 2024, Norges Bank's forecasts showed.

The policy rate was zero a year ago, and the hikes are now starting to have a tightening effect on the Norwegian economy, Norges Bank said.

"This may suggest a more gradual approach to policy rate-setting ahead," it added.

The Norwegian crown fell to 10.24 against the euro just after the 0800 GMT announcement, from 10.20 just minutes earlier. By 1145 GMT it traded at 10.23 per euro.

Of 30 economists polled by Reuters, 28 had predicted Norges Bank would hike by 50 basis points (bps) while one forecaster had said a 25 bps increase to 2.0% was the most likely outcome, and another predicted a rise of 75 bps to 2.50%.

"Maybe we are seeing Norges Bank now being the first to turn slightly "dovish"," Danske Bank said. "More hikes in store but peak is getting closer."

Nordea Markets said the rate path was "on the dovish side to what markets expected beforehand".

While consumer price inflation will continue to rise, a large part of the economy is headed for a contraction next year.

Norges Bank raised its 2023 core inflation forecast to 4.8% from 3.3% seen in June, far exceeding its 2.0% goal.

It cut next year's forecast for Norwegian gross domestic product outside of the oil and gas sector to a fall of 0.3% from an earlier prediction of 1.1% growth.

It also follows Sweden's unexpected full percentage point hike to 1.75% on Tuesday.