Norway Raises Rates, Sweden Signals Hike as War-Driven Inflation Spreads

Norway's central bank raised interest rates on Thursday, while Sweden's central bank left rates unchanged but signalled it would likely tighten policy before the end of the year, as policymakers worldwide confront inflation stoked by a war-driven energy shock.

Both Nordic central banks struck a similar tone, cautioning that higher fuel prices stemming from the Middle East conflict could slow inflation's return to their 2% target.

"By raising the policy rate, we are helping to reduce inflation," Norges Bank Governor Ida Wolden Bache said, adding that it would likely be necessary to keep the policy rate elevated for a time and that the committee was prepared to raise it further if needed.

Sweden's Riksbank Governor Erik Thedeen told reporters that if the outlook for inflation and growth remained the same, the policy rate would rise before the end of the year. Denmark's central bank, which pegs its currency to the euro, has already moved.

Investors expect another rate hike in Norway and four in Sweden by the end of spring.

The Nordic moves follow rate increases this month by the US Federal Reserve, the European Central Bank and the Bank of Japan. The underlying thinking is that while the current rise in inflation is largely due to hard-to-control fuel costs, those may start to feed through to other prices, wages and people's expectations, requiring preventive action.

"We unfortunately had to learn that this is much more persistent than we thought," ECB policymaker Isabel Schnabel said at an event on Thursday. "This has pushed up our inflation outlook...and this is then also why we had to respond."

The Swiss National Bank remained an outlier, keeping rates at zero despite nudging up its inflation forecasts for the coming months.

"Our new conditional inflation forecast indicates that medium-term inflationary pressure has only increased slightly compared with June," SNB Chairman Martin Schlegel said.

Switzerland has long experienced lower inflation than many neighbouring economies, aided by the safe-haven status of the Swiss franc, which tends to strengthen in times of uncertainty. Still, money markets see the SNB raising rates three or four times over the next year.

Signs of inflation concerns were already visible in bond markets, where investors were demanding the highest yield in two decades to hold long-dated government debt. A stronger-than-expected US business survey added to evidence that the world's largest economy was running hot, also due to easy fiscal policy and an investment boom driven by flows into artificial intelligence.

This was seen as possibly leading the Fed to raise short-term rates farther to bring down inflation expectations and long-term bond yields.

"Investors remain concerned over a range of risks, including geopolitical developments, inflation, government debt, and the sustainability of AI capex," UBS wrote in a note to clients.