Norway’s central bank opted against raising its key policy rate on Thursday, even though inflation is still high and the country’s currency, the krone, remains historically weak. The krone has nonetheless strengthened by more than expected in recent weeks, according to the bank’s monetary policy committee, and the Norwegian economy is “cooling down.”
Norges Bank Governor Ida Wolden Bache said the committee therefore decided that the current policy rate is “sufficiently high (at 4.5 percent) to return inflation to target (still just 2 percent) within a reasonable time horizon.” Inflation is currently pegged at 4.8 percent by Norway’s state statistics bureau SSB, but unemployment was described as “low,” at 3.7 percent.
The policy rate was boosted by another quarter-point last month for the 14th time since the fall of 2021. That’s when the central bank decided to start raising rates from the highly unusual zero set in the spring of 2020 in respose to the Corona crisis. Analysts have been speculating recently that the level imposed just before the Christmas holidays may mark a new peak, and Bache indicated Thursday morning that they may be right.
“Both inflation and economic activity have been broadly in line,” she said, with the projections made in the bank’s Monetary Policy Report for December 2023. Since the “overall prospects for the Norwegian economy do not appear to have changed” much since then, the committee saw no pressing need to raise rates again.
That provides some relief for Norwegians who borrowed heavily in a high-priced housing market over the past few years when interest rates were extraordinarily low. Their monthly mortgage payments have since climbed considerably, sparking household anxiety even though rates remain relatively low on a historic basis.
The bottom line is that the current policy rate, which often results in mortage rates around two points higher, is having “a tightening effect and the economy is cooling down,” the bank stated in its rate decision announcement. It also noted that business costs have “increased considerably in recent years” while “continued high wage growth and the krone depreciation through 2023 will likely restrain disinflation.” The krone, meanwhile, was trading at NOK 10.44 against the US dollar just before the lack of a new rate hike was confirmed on Thursday. An hour later, a US dollar still cost NOK 10.41.
It all means, according to Bache and the committe she leads, that “there will likely be a need maintain a tight monetary policy stance for some time ahead.” Rates will only start to decline, she said, “when inflation falls back and economic conditions so warrant.”