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December 17, 2020 11:45 AM

Norway, England central banks hold firm on interest rates

Sophie Baker
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    The Norges Bank, Norway's central bank, stands in Oslo, Norway, on March 25, 2020
    Bloomberg
    The Norges Bank committee unanimously decided to keep the policy rate at zero.

    The Bank of England and Norway's central bank both kept interest rates unchanged, the banks announced Thursday, but Norges Bank raised the prospect of rates increasing sooner than expected while BoE warned of future inflation.

    Norges Bank's monetary policy and financial stability committee unanimously decided to keep the policy rate at zero. The bank's December 2020 Monetary Policy Report said its forecast implies keeping a zero rate for over a year, "followed by a gradual rise from the first half of 2022 as activity approaches a normal level."

    The December forecast shows a faster rate rise than the September report, which implied "a rate at the current level over the next couple of years."

    The bank said the COVID-19 pandemic has led to a "sharp downturn in the Norwegian economy" and while activity has improved since the spring, higher infection rates and restrictions are "now holding back the recovery."

    However, positive news on COVID-19 vaccines, with the potential for a vaccination program to begin in the near future, "may result in a faster pickup in economic activity than previously projected. Nevertheless, it will probably take time for output and employment to return to pre-pandemic levels."

    Inflation has declined but is still above Norges Bank's target of close to 2%. The average 12-month rise in some indicators of underlying inflation fell to 2.5% in November, from 2.9% in October.

    "The sharp economic downturn and considerable uncertainty surrounding the outlook suggest keeping the policy rate on hold until there are clear signs that economic conditions are normalizing," Oystein Olsen, governor of the bank, said in the release.

    Separately, the Bank of England kept interest rates unchanged at 0.1%, with its monetary policy committee also voting unanimously at a meeting on Wednesday to keep its asset purchase program unchanged.

    However, the bank issued a warning on U.K. inflation, with 12-month consumer price index inflation falling to 0.3% in November from 0.7% in October. The drop triggered the exchange of letters between the governor of the bank, Andrew Bailey, and Chancellor of the Exchequer Rishi Sunak.

    The weakness "largely reflects the direct and indirect effects of COVID on the economy," a news release said. "CPI inflation is expected to rise quite sharply towards the target in the spring, as the (value-added tax) cut comes to an end and the large fall in energy prices earlier this year drops out of the annual comparison." The bank is targeting inflation at 2%.

    The U.K. economy's outlook "remains unusually uncertain," with the evolution of the pandemic and resulting restrictions, the trading arrangements between the European Union and the U.K. and the response of households, businesses and financial markets to these developments, the release said.

    Should the outlook for inflation weaken, the committee "stands ready to take whatever additional action is necessary to achieve its remit. The committee does not intend to tighten monetary policy at least until there is clear evidence that significant progress is being made in eliminating spare capacity and achieving the 2% inflation target sustainably," the release added.

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