Norway Becomes First Western Country to Raise Key Rate Since Start of COVID-19 Pandemic

© REUTERS / Gwladys FoucheA general view of the Norwegian central bank, where Norway's sovereign wealth fund is situated, in Oslo, Norway, March 6, 2018
A general view of the Norwegian central bank, where Norway's sovereign wealth fund is situated, in Oslo, Norway, March 6, 2018 - Sputnik International, 1920, 24.09.2021
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Norway's key interest rate had been at a record-low zero-percent level since May 2020, when the Central Bank slashed interest rates by 1.5 percent to counter the coronavirus pandemic that hamstrung economic activity. Today's hike made amid a normalisation of the economy is seen as a starting point for a longer period of interest rate hikes.
For the first time in almost a year and a half, Norway's Central Bank (Norges Bank) is raising the nation's key interest rate by 0.25 percent, becoming the first major western central bank to do so.
The key interest rate had been at a record-low zero-percent level since May 2020, when the Central Bank slashed interest rates by 1.5 percent in a matter of weeks to counter the onslaught of the coronavirus pandemic that hamstrung economic activity.
Macroeconomists argued for the key interest rate to be raised at a recent September meeting, which the Central Bank also signalled, alongside future interest rate hikes in the coming months.

"The normalisation of the economy indicates that it is now appropriate to start a gradual normalisation of the key policy rate", Central Bank Governor Øystein Olsen said in a statement.

Within the macroeconomic community, this is seen as a sign of recovery. The gradual reopening of society is said to have given a marked boost to the Norwegian economy, with activity returning to pre-pandemic levels or even surpassing them. Unemployment has also fallen, and the Central Bank believes that the upswing in the economy will continue throughout the autumn. The decision to raise the key rate is thus seen as a starting point for a longer period of interest rate hikes, as the Central Bank cited the need to counter a build-up of financial imbalances and voiced plans for interest rates to grow as high as 1.75 percent by the end of 2024, the news outlet E24 reported.
While several major economies, including South Korea and Brazil have already upped their rates, Norway is the first country from the list of ten most-traded currencies to do so.
Other western central banks have been split over the issue of raising interest rates. While the Bank of England and the US Federal Reserve previously hinted at imminent interest rate hikes as well, Sweden's Central Bank (Riksbank) confirmed that the zero-level interest rate would remain in place at least until 2024. Switzerland went so far as to keep its unique negative rate of minus 0.75 percent.
Nevertheless, the Central Bank of Norway, a country that is home to the world's largest sovereign wealth fund with $1.4 trillion in assets, warned of the emergence of new COVID-19 strains and how they could potentially affect the economy. Still, it voiced hope for a firm rebound amid low underlying inflation and unemployment.
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