Norway's Central Bank Looks Beyond Covid-19

By Anna Hirtenstein

Norway's central bank has signaled that it plans to take the plunge by making the country the first developed nation to shift from pandemic-era policy and raise interest rates by the end of the year.

The oil-rich country's central bank, Norges Bank, said Thursday that a faster-than-expected pickup in global economic activity coupled with notable growth in domestic house prices have prompted it to advance plans to boost interest rates from zero.

The Norwegian krone briefly strengthened, rising 0.6% against the euro and 0.7% against the dollar, before falling back as benchmark oil prices tanked on concerns of longer-running energy demand shocks. Investors and analysts are expecting the currency to strengthen further this year. On Tuesday, it depreciated against the dollar.

"The economy has weathered the crisis very well and this is hawkishly acknowledged by Norges Bank," said Vasileios Gkionakis, global head of foreign-exchange strategy at Lombard Odier. "It's also a reflation trade, commodity countries are going to do well. This is clearly bullish for the Norwegian krone."

Norway's economy shrank 2.5% in 2020, according to central bank data. While it was the country's worst decline since 1944, it was less than nearly every other nation in the region. The eurozone's economy compressed 6.8% last year, according to the latest estimates from the European Commission. Norway's relative resilience means that it can rein in loose monetary policy faster, analysts said.

A key reason for the country's ability to weather the shock is its sovereign-wealth fund, which manages over $1.2 trillion. The government was able to tap the fund for fiscal support without having to take on more debt. The central bank on behalf of the government more than tripled its daily purchases of its own currency last summer, compared with the level at the end of 2019.

The biggest source of income for the sovereign-wealth fund has been Norway's oil-and-gas industry, which is the largest in Western Europe. Norway's gross domestic product and currency fluctuate with oil prices. Brent crude has risen about 20% this year, as traders increasingly expect energy demand to pick up in line with a global economic recovery.

Investors were widely expecting the Norwegian central bank to raise interest rates, but not this fast. Many were positioned for the differential between Norway's policy rate and the rest of Europe to widen by buying the krone, said Andreas Koenig, head of global foreign exchange at Amundi. A bigger difference is likely to attract more foreign capital, he said. Mr. Koenig currently owns more krone than the benchmark he tracks.

Some are more skeptical about the krone's direction. "The issue going forward is how much can the central bank deviate from other central banks without putting too much pressure on the currency," said Svein Aage Aanes, head of fixed income at DNB Asset Management. "There's clearly a possibility that it could be harder than expected to actually deliver those hikes."

While Norway's bond market is small due to its income from natural resources, the country's debt could draw more interest from investors as the central bank raises rates and yields rise, especially as many other European bond yields are currently in negative territory.

"They look attractive compared to Europe" at all maturities, said Helen Anthony, a fixed income portfolio manager at Janus Henderson. Norwegian bonds "look really attractive on a global basis, up to the five-year point."

But they are still outshone by rising yields in the U.S., which are making longer-dated Treasury bonds look even more appealing, she said. The U.S. benchmark 10-year yield was at 1.655% Tuesday, compared with 1.404% for the Norwegian equivalent.

Write to Anna Hirtenstein at [e-mail]

(END) Dow Jones Newswires

03-23-21 0624ET