Norway’s central bank has raised its policy rate by 0.25 percentage points to 4.25 per cent, becoming the first European central bank to tighten monetary policy since the start of the latest Middle East war.
In a statement on Thursday, Norges Bank governor Ida Wolden Bache said: “Inflation is too high and has run above target for several years.”
Underlying inflation, the gauge preferred by Norway’s central bank, stood at 3 per cent in March, well above its official target of around 2 per cent.
The Oslo-based institution also warned that “there is substantial uncertainty about future economic developments”, pointing in particular to the impact of fighting in the Middle East.
“The increase in oil and gas prices due to the war in the Middle East could push up inflation further,” it added.
Oil prices have surged worldwide since the United States and Israel launched strikes against Iran on February 28 this year, a move followed by a blockade of the Strait of Hormuz.
Hopes of a peace deal have since pulled prices back down, with Brent crude slipping below the $100 (€92) mark.
In neighbouring Sweden, an EU member, the Riksbank on Thursday left its main rate unchanged at 1.75 per cent.
The Swedish central bank said there was “scope to wait until there is a clearer picture of the effects of the war and the supply shocks it entails”.
Although Norway is not part of the European Union, the country sits inside the European Economic Area and its economy is tightly linked to the bloc. Decisions taken by Norges Bank are followed closely by traders and policymakers across EU member states, particularly in countries that share strong commercial ties with Oslo.
Sweden, by contrast, is an EU member that has kept its own currency, the krona, rather than joining the euro. Its monetary policy is therefore set by the Riksbank rather than by the European Central Bank (ECB) in Frankfurt.
The diverging paths of the two Nordic neighbours underline how differently European policymakers are reading the economic impact of the Middle East war. Norwegian officials appear more concerned about the inflationary effect of higher energy prices, given the country’s role as a major oil and gas exporter, while their Swedish counterparts are more focused on the risk that the conflict could weigh on growth.
Norges Bank indicated it was prepared to act again if price pressures did not ease, though it stopped short of committing to a specific path for further rises. For households and businesses, higher borrowing costs in Norway would mean more expensive mortgages and loans at a time when many consumers are already grappling with rising food and energy bills.
