Norway's central bank hikes rates by 50 basis points in bid to tackle surging inflation

Norway's central bank on Thursday hiked its benchmark interest rate by 50 basis points and flagged a likely further hike in September as inflation soars.

The increase takes the Norges Bank's sight deposit rate to 1.75% from 1.25%, exceeding its prior forecast in June. Norwegian inflation hit an annual 4.5% in July, up from 3.6% in June and well ahead of consensus projections for 3.8%.

In its decision notice, the Norges Bank monetary policy committee said activity in the Norwegian economy remained high, with little spare capacity, while unemployment has fallen further and is at a very low level.

Policymakers also noticed that price rises had broadened in recent months, and may signal that inflation will remain high for longer than previously expected. The central bank suggested that a faster rate rise now would reduce the risk of high inflation becoming "entrenched," which would necessitate a sharper tightening of monetary policy further out.

"A markedly higher policy rate is needed to ease the pressures in the Norwegian economy and to bring inflation down towards the target," says Governor Ida Wolden Bache.

Thursday's report also noted that there is a risk that "little spare capacity in the Norwegian economy and persistent global price pressures will lead to a further acceleration in price inflation."

Yet the committee acknowledged that while monetary policy tightening may cool the housing market and limit household consumption faster, there is also a risk of a sharper slowdown in global growth.