Norway central bank rate hike beckons as recovery continues

OSLO: Norway's central bank said it was on track to hike interest rates later this year if the economic recovery from the coronavirus pandemic proceeds as it expects.

The bank kept its key policy interest rate on hold at a record-low 0.0% at its latest meeting on Thursday, as expected.

Norges Bank plans to raise rates in the third or fourth quarter of 2021, likely making it the first among G10 central banks to increase the cost of borrowing since the pandemic began.

The Norwegian economy contracted by 2.5% last year in what was its worst performance since 1945, although the decline was smaller than in most other European nations, reflecting the country's less severe COVID-19 outbreak.

The government has launched the first step of a four-point plan to reopen society, and economists recently polled by Reuters expect economic growth of 3.7% in 2021.

"In the committee's current assessment of the outlook and balance of risks, the policy rate will most likely be raised in the latter half of 2021," Governor Oeystein Olsen said in a statement.

While economic uncertainty remains, Norges Bank no longer used the term "substantial uncertainty" with regards to the outlook for the second half of the year, as it had done two months ago when it first flagged the option of a 2021 hike.

"There is a nuance in the way we describe the economic outlook," Olsen told Reuters in a video interview.

"We're a bit more certain as things have developed largely as we anticipated since our March report, so we're a little more confident," he said.

The central bank reiterated it wanted to see clear signs of economic recovery before a rate hike takes place and said the progress of the country's COVID-19 vaccine programme suggested activity would pick up as the year went on.

Norway currently expects all adults to be offered at least one vaccine dose by late July.

Norges Bank's announcement was exactly as expected and pointed to a rate increase in the second half of 2021, Danske Bank Chief Economist Frank Jullum said.

"That also means it is still 50-50 whether (the rate hike) will come in September or December," he said.

Norway's currency, the crown, weakened slightly after the announcement.

Norges Bank's next rate meeting and outlook revisions are due on June 17.