Norges Bank Unexpectedly Leaves Rate Unchanged Again

(RTTNews) - Norway's central bank left its key interest rate unchanged on Thursday despite signaling an easing in the previous policy session in January, citing a stronger than expected acceleration in inflation and the uncertain economic outlook but continued to hint at the possibility of a reduction during the course of the year.

The Monetary Policy and Financial Stability Committee, led by Governor Ida Wolden Bache, held the policy rate steady at 4.5 percent, Norges Bank said.

"Inflation has picked up and been markedly higher than expected. If the policy rate is lowered prematurely, prices may continue to rise rapidly," Governor Bache said. "Therefore, we decided to leave the policy rate unchanged now," the Norges Bank chief added.

Norway's policy rate has remained at 4.5 percent since December 2023. In January, policymakers had clearly signaled a reduction in March, which would have been a first since May 2020.

"There is uncertainty about future economic developments, but the Committee's current assessment of the outlook implies that the policy rate will most likely be reduced in the course of 2025," the Norwegian central bank said.

Policymakers expect the high growth in business growth and stronger than projected wage growth in 2024 to lead to stronger than projected inflation in the coming months.

The rate-setting body assessed that a restrictive monetary policy is still needed to bring inflation down to target. The bank is worried that a premature lowering of the policy rate may boost inflation rapidly.

However, policymakers are also concerned that an overly tight monetary policy could restrict the economy more than needed to bring inflation down to target.

"Weighing these trade-offs, the Committee judges that the current stance is warranted for somewhat longer than previously signaled," the bank said.

The policy rate is forecast to drop to 4 percent by the end of the year, followed by a gradual further decline over the next years, the latest monetary policy report of the bank showed. The forecast was revised up somewhat from the previous report. The bank expects the Norwegian economic growth to gain steam in the years ahead but unemployment to rise slightly to around pre-pandemic levels. Inflation is forecast to ease and be close to 2 percent towards the end of 2028.

"The uncertainty surrounding the outlook is greater than normal," the bank said.

Capital Economics expects two interest rate cuts this year that will take the policy rate down to 4.0 percent. But the risks are skewed towards Norges Bank leaving the policy rate high for longer, Jack Allen-Reynolds, an economist at the research firm, said.

The next rate setting session of Norges Bank is scheduled in May.