While core Norwegian inflation edged further above target in December, it is set to fall back swiftly this year and so the Norges Bank will be in no rush to raise interest rates.
Norwegian inflation to fall sharply this year
- While core Norwegian inflation edged further above target in December, it is set to fall back swiftly this year and so the Norges Bank will be in no rush to raise interest rates.
- The rise in Norwegian headline inflation in December, from 0.7% in November to 1.4%, left the rate above the consensus (1.2%) but well below our forecast (2.2%). As we expected, energy prices were less of a drag on the headline rate – electricity and gas inflation jumped from -31.9% to -19.7% – but this was offset by a significant fall in food and non-alcoholic drinks’ inflation.
- More importantly, the Norges Bank’s target variable, CPI-ATE (which excludes energy and the impact of tax changes) edged up in December and has now been above the 2% target for a year. The rise from November was driven by the goods component. (See Table 1.) This was driven by a smaller drag from clothing and a pick-up in furniture prices, but this was offset by falling food prices. Meanwhile, the services component of CPI-ATE was unchanged at 2.5%, its lowest rate since December 2018.
- Looking ahead, while the resurgence in virus cases in Norway has been far less pronounced as elsewhere in Europe, the recent tightening of virus-related restrictions will probably keep a lid on services inflation in the near term. More generally, the inflationary impact of previous falls in the krone is likely to peak soon and will shift into reverse this year. (See Chart 1.) Against this backdrop, we expect CPI-ATE to fall back to target by the middle of the year.
- While we do not think that policymakers will be in a rush to raise rates, the prospect of the Norges Bank being amongst the first to eventually begin to raise rates should support the krone. We forecast it to rise to NOK 9.75 against the euro, and parity with the SEK, by the end of the year. (See here.)
Chart 1: Krone Exchange Rate & Imported Goods Inflation (% y/y)
Sources: Refinitiv, Capital Economics
Table 1: Norway Consumer Prices
CPI-ATE Consumer Goods
Melanie Debono, Europe Economist, email@example.com