Norway’s Norges Bank Raised Rates by 50 bps to 3.75%, Supports Krone, Fights Inflation

Norway’s central bank, the Norges Bank’s Monetary Policy and Financial Stability Committee unanimously raised the policy benchmark interest rate by 50 bps to 3.75 percent during its June meeting, bringing borrowing costs to the highest level since December 2008. Consensus was divided with 14 expecting +25bps and 11 expecting 50bps. The result surprised markets and drove the 2-year yield up 16bps and the krone up by about 1½% to the dollar. Norges bank refreshed explicit forward guidance raised the projected terminal rate to 4.25% with guidance that the policy rate will be raised again at the August 17th decision.

Norway Norges Bank Headquarters Oslo

The bank had five consecutive hikes by December, equaling the sharpest hike since 2002.

The Committee noted that the latest inflation readings were well above the central bank’s target of 2%. said the policy rate will need to be increased somewhat further to bring inflation in line. The bank indicated that it is likely to raise interest rates again if the krone remains weaker than expected or if there are persistent pressures in the economy.

Norway benchmark interest rate

The new guidance also implied a more muted easing path over the forecast horizon stretching to 2026 as shown below. The result surprised markets and drove the 2-year yield up 16bps and the krone up by about 1½% to the dollar.

Turbulence in international banking markets

The problems last month at certain US and Swiss banks have led to large movements in global financial markets and returned with more turmoil in the US regional banks. Equity markets have fallen, and risk premiums in money and bond markets have increased a little. Expectations for both Norwegian and international policy rates have declined markedly.


The annual inflation rate in Norway increased to 6.7% in May from 6.4% in April.

“If we do not raise the policy rate, prices and wages could continue to rise rapidly and inflation become entrenched. It may then become more costly to bring inflation down again”, says Governor Ida Wolden Bache.

The annual inflation rate in Norway increased to 6.7% in May 2023 from 6.4% in the previous month and above market forecasts of 6.2%. On a monthly basis, consumer prices rose 0.5%, slowing from a 1.1% jump in April. CPI adjusted for tax changes and excluding energy products, advanced by 6.7% year-on-year, the highest reading since comparable records began in 2003.

Norway CPI Inflation Rate
  • Prices accelerated mainly for food & non-alcoholic beverages (12.7% vs 10.5% in April), housing & utilities (5% vs 4%), clothing & footwear (3.4% vs 2.5%) and alcoholic beverages & tobacco (6% vs 5.2%).
  • On the other hand, inflation primarily slowed for transport (7.5% vs 7.9%), furnishings, household equipment & maintenance (7.1% vs 10.9%) and recreation & culture (7.3% vs 8.2%).

Norges Bank Rate decision June 2023

Norges Bank’s Monetary Policy and Financial Stability Committee decided to raise the policy rate by 0.50 percentage point to 3.75 percent. The Committee’s current assessment of the outlook and balance of risks implies that the policy rate will most likely be raised further in August.

Inflation is markedly above the target. Wage growth is set to be higher than in 2022. Activity remains high amid continued tightness in the labour market, but pressures in the Norwegian economy are easing.

The Committee judges that a higher policy rate than previously signalled is needed to bring inflation down to target. Inflation has been markedly higher than projected in the March Report. International interest rates have risen more than anticipated. Higher wage growth and a weaker krone than projected earlier will push up inflation ahead.

“If we do not raise the policy rate, prices and wages could continue to rise rapidly and inflation become entrenched. It may then become more costly to bring inflation down again”, says Governor Ida Wolden Bache.

The interest rate path ahead will depend on economic developments. If the krone turns out to be weaker than assumed or pressures in the economy persist, a higher-than-projected policy rate may be needed to bring inflation down towards the target. At the same time, the effects of the past rate hikes are not yet fully evident. Looking ahead, the tightening effect of high inflation and higher interest rates on household consumption is uncertain. If inflation declines more rapidly or there is a more pronounced slowdown in the Norwegian economy, the policy rate may be lower than currently envisaged.

The policy rate forecast has been revised up since the March Report and indicates a rise in the policy rate to 4.25 percent in the course of autumn.

The August policy rate decision will be presented at an event during “Arendalsuka” on 17 August (see Norges Bank’s calendar).

Rate effective from 23 June 2023:
Policy rate: 3.75 %
Overnight lending rate: 4.75 %
Reserve rate: 2.75 %

Norway Oil Fund

Norway’s $1.4tn wealth fund is the world’s largest sovereign wealth fund. It began in 1996 when oil revenue from the government was transferred to the fund for the first time. The mission of the fund is to provide financial wealth and stability for future generations of Norwegians once the oil revenues declines.

” The Government Pension Fund Global is saving for future generations in Norway. One day the oil will run out, but the return on the fund will continue to benefit the Norwegian population.” via Norway Fund

Norway’s oil fund owns on average 1.5 per cent of every listed company globally according to the FT.

Inflation and Fund Management

Inflation is identified as an issue at the oil fund, CEO Tangen, who warned that climate change will keep inflation high, said the fund was already using advanced algorithms to reduce trading costs and complexity and to boost internal productivity.

“The way we are putting money into the market, we are using AI models to predict when in the day, or over the month- or quarter-end we should deploy the capital. We are reducing trading activity because we are using AI models,” he said in an interview with FT.

“So, you can reduce the number of trades, and there are huge savings to be had there too,” he said, adding that: “It’s not like it’s on complete autopilot. We are monitoring it. It’s not like we’re the giving the fund to robots, and saying ‘hey, see you later’.”

Source: Norway, Sovereign wealth fund institute, FT

Clearly the small Nordic nation has been very successful in it’s investments and is prudent when comes to monetary policy.

2022 and January 2023 Return Update

At the end of January 2022 Norway’s $1.3tn oil fund had recovered in the first month of 2023 after its worst year since the global financial crisis. The fund had an annual return last year of minus 14.1 per cent, or NKr1.6tn ($159bn). It came with the biggest fall in Norwegian kroner terms on record. The sovereign wealth fund gained 5 per cent in January 2023, chief executive Nicolai Tangen told a press conference.

“It’s potentially one of those moments,” he said, referring to the rebound in 2009 after the financial crisis, “but the outcome this year is more uncertain than normal”.

The fund has also reduced its positions in the troubled Adani group of companies, Tangen said. The fund had holdings as of Monday of about $200mn in Adani companies, compared with its weight in the fund’s index of about $800mn.

The Fund is managed by Norway’s central bank, Norges Bank.  Norges Bank Investment Management ” aims to make the most of the fund’s two distinguishing characteristics, its long-term approach and its considerable size, to generate strong returns and safeguard wealth for future generations.”

Equities had a negative return of 15.3 per cent, bonds lost 12.1 per cent while property eked out a 0.1 per cent gain.

Worse performers were technology companies with the worst performers of all the fund’s equity investments were Amazon, Meta, Tesla, Alphabet and Apple as a result of the sell-off in big tech companies that led the pandemic-era rally in 2020-21.

Best performers were energy companies, with ExxonMobil, Chevron, TotalEnergies and Shell plus drugmaker Novo Nordisk for the fund in 2022.

The aim is of the fund is diversification and that was shown with the fund as a whole not losing value in 2022 despite the large negative return as huge inflows from Norway’s oil and gas revenues, boosted by Russia’s war against Ukraine, stood at record levels. Norway’s petroleum revenues soared as the Scandinavian country displaced Russia as the biggest supplier of gas to the EU.

The aim of the fund was diversification from oil and to invest in opportunity. “We invest in almost 9,000 companies and have investments in 77 countries.’ Says Norges Bank on their website.

Outside of Oslo Norges Bank has offices in Luxembourg, Tokyo, London, New York, Singapore and Shanghai to manage their investments. The spread gives you an idea of their focus.

Source: Norges Bank

From The Traders Community Research Desk