After months of raising hopes that Norway’s relatively high interest rates would finally be cut, the country’s central bank ended up disappointing millions of borrowers on Thursday. Norges Bank kept its policy rate at 4.5 percent, and that’s also likely to affect ongoing labour negotiations.
The bank’s committee on monetary policy and financial stability remains worried about inflation, and clearly feared that cutting interest rates would lead to more price hikes. Inflation has already risen, also at a surprising rate, and the bank is trying to avoid a new price spiral.
“Inflation has picked up and been markedly higher than expected,” said the central bank’s governor Ida Wolden Bache in announcing the decision to keep the policy rate unchanged. “If the policy rate is lowered prematurely, prices may continue to rise rapidly.”
Most Norwegian economists had expected that Bache and her committee at the bank would drop plans to lower rates this month after a rapid series of interest rate hikes since December 2023. They also have noted that economic growth has increased during the first quarter and businesses expect stability through the second quarter. That indicates there wasn’t much need to spur the growth that an interest rate reduction could bring.
Bache herself has repeatedly noted that tight monetary policy and the string of interest rate hikes have contributed to cooling down the Norwegian economy and dampening inflation. Unemployment has edged up but remains relatively low.
Wage growth in 2024, meanwhile, turned out to be higher than expected. That can also lead to inflation that’s higher than expected, while labour unions are demanding “real wage growth” that’s higher than inflation. With inflation now running at around 4.9 percent, that would mean a wage settlement of more than 5 percent and both labour and employers head into mediation.
The central bank thinks “restrictive monetary policy is still needed to bring inflation down to target (still just 2 percent) within a reasonable time horizon.”
Borrowers’ hopes weren’t entirely dashed, however, with the committee stating that its “policy rate forecast” remains “consistent with a decline in the policy rate to 4 percent by the end of the year.” It all relies on the uncertainty that continues to surround the economic outlook, which remains “greater than normal.”
NewsinEnglish.no/Nina Berglund