Norwegian business activity has risen during the past three months and will continue to expand during the next half year, according to a Norges Bank business survey.
“Contacts report higher output growth in all sectors over the past three months. The rise has been most pronounced in manufacturing and household services,” Norway's central bank said in a statement accompanying the quarterly sentiment index. However, capacity constraints are now growing, it added. “Close to half of the contacts are facing capacity constraints.”
The sentiment index, most of which was collected from Aug. 2-20, showed employment had risen during the preceding three months and will likely continue to do so.
“At the same time, more contacts than for some time report difficulties in recruiting qualified labour. The supply of raw materials is also cited as a key capacity constraint” the central bank said.
Norges Bank is widely expected to raise its interest rate at a monetary policy meeting this week, from a record low 0%, in the first such post-pandemic tightening among nations with the world’s 10 most-traded currencies.
Responding to a buoyant economic recovery, Norges Bank will lift its benchmark on Thursday (Sept. 22) by a quarter-point from zero, according to all but one of the 15 economists surveyed by Bloomberg.
The Norges Bank held its benchmark interest rate at a record low of 0.0% during its August meeting, as expected. Officials stated that the gradual lifting of COVID-19 restrictions has driven a marked rise in activity, and unemployment has fallen further. Meanwhile, underlying inflation has declined and is below the 2% target.
The policy rate forecast is broadly in line with the June 2021 Monetary Policy Report which pointed to a gradual rise from autumn 2021. Governor Oystein Olsen said in June that the bank will deliver 25 basis-point hikes each quarter over the coming year, starting “most likely” in September.
Although there is still uncertainty around the evolution of the pandemic and its impact on the Norwegian economy, Norges Bank has managed to avoid resorting to unconventional policy measures such as negative interest rates or asset purchases, thanks to Norway’s $1.4 trillion sovereign wealth fund, the world’s largest, which has been available to deliver record budget stimulus.
Officials also said that low interest rates reduce the risk of unemployment becoming entrenched at a high level and help return inflation towards the target, but warned that they could also increase the risk of a build-up of financial imbalances.
Norges Bank raised its key interest rate for the first time in two years on Thursday (Sept. 23) becoming the first major Western central bank to raise interest rates since Covid-19 struck. The Monetary Policy and Financial Stability Committee unanimously decided to raise the policy rate from zero percent to 0.25 percent.
“A normalising economy now suggests that it is appropriate to begin a gradual normalisation of the policy rate,” stated Governor Oystein Olsen.
"Barring any further unwelcome surprises on Covid-19, we expect another rate hike in both December and March 2022," ING economist James Smith said.