Norway’s central bank shocked economists and cheered borrowers on Thursday when it cut interest rates for the first time in five years. It was only a quarter-point decline, but that will still lower monthly mortgage payments and ease household budgets.
“Inflation has declined since the (last) monetary policy meeting in March,” said the governor of Norges Bank, Ida Wolden Bache,. She also thinks the inflation outlook for the coming year “indicates lower inflation than previously expected.” While prices at the grocery store have continued to rise, Bache and her fellow members of the bank’s monetary policy committee don’t want to restrict the economy “more than necessary.”
They thus surprised almost everyone by lowering their policy rate from 4.5 percent to 4.25 percent. Norway’s largest bank, DNB, quickly announced the same rate decline on home mortgages. Other banks were expected to follow.
Bache referred to the decline as a “cautious normalization” of the Norwegian central bank’s policy rate, which has remained at a much higher level than in many other countries. In neighbouring Sweden, for example, the key policy rate was also lowered again this week, to just 2 percent.
That shows how Norwegian interest rates remain relatively high, but economists and analysts had almost universally expected interest rates to remain unchanged and stay even higher. They’ve cited everything from relatively high price growth to lots of money in the system and ongoing fears around a weak currency. Norway’s krone had recently strengthened against the US dollar, which has cost just under NOK 10 in recent days for the first time in months. It was back over NOK 10 within minutes of Thursday’s interest rate announcement.
Bache and the committee think a restrictive monetary policy “is still needed,” but not as restrictive as it’s been. She also hinted at additional rate declines, “to just below 4 percent at the end of 2025 and to about 3 percent towards the end of 2028.” That can bring average residential mortgage rates down from around 5.6 percent now “to 4.6 percent in 2028,” she said.
Not only were borrowers pleasantly surprised on Thursday, so was Prime Minister Jonas Gahr Støre of the Labour Party. With a national election looming in September, the rate cut can boost his already strong chances of winning a second term. “It’s good news that Norges Bank lowered interest rates today,” Prime Minister Jonas Gahr Støre told news bureau NTB right after the announcement. Labour is still leading all other parties in recent public opinion polls, and an interest rate cut can further boost his re-election campaign.
Bache, meanwhile, cautioned that economic uncertainty remains “greater than normal,” and she remains committed to bringing inflation (currently around 2.5 percent) down to a long-standing 2 percent target. The next interest rate announcement will come during a week of annual political meetings in Arendal in mid-August, just a few weeks before the national election.
NewsinEnglish.no/Nina Berglund
