Norges Bank hikes by 25bp
Norges bank increased rates by 25bp to 4.5% citing concerns over the inflation outlook. While the Bank noted that underlying inflation had moderated over the summer and was actually lower than they had expected in June, the outlook for inflation had not materially changed given the backdrop of higher energy costs and other commodities. The Committee’s assessment of the outlook implies that it will likely be necessary to keep the policy rate elevated for a time. The Committee is also prepared to raise the policy rate further if warranted by the inflation outlook.
However, the Bank also acknowledged that the outlook for inflation will be helped by moderating wage growth which along with a stronger Krone should help to push core inflation below 3% “in coming months”. Moreover, its moderately estimate of the output gap is projected to fall through 2026 and this should help dampen wage growth ahead.
The Bank also noted that inflation expectations on the 2- and 5-year horizon have slowed since peaking in 2023 but have not fallen further over the past year. Mainland GDP is projected to rise by 0.9% in 2026, which is lower than in 2025. The projection is unchanged from the June Report. Inflation is expected to slow from next year and move down to 2% in 2029.
In a sign that the Bank is close to done with hiking, the Committee said that it “does not want to restrict the economy more than needed”, but judges that a somewhat tighter monetary policy stance is needed to return inflation to target within a reasonable time horizon.
The policy rate forecast (or rate path) embedded in the forecasts is little changed in the near term but higher in the longer term than in the June Report. The policy rate path is consistent with the rate “remaining at 4.5% for a time”. The policy rate forecast then falls gradually from the end of next year to just below 3.5% towards the end of the projection period in 2030.
Figure 1: Revised Norges Bank Policy Outlook
Source: Norges Bank MPR (%)
Heading into today’s meeting, the decision had been finely balanced because of contrasting price dynamics over the summer in which core undershooting the Bank’s June expectations but headline above it. The Bank remains concerned about inflation given that higher energy prices should continue to support headline CPI and could still feed through more broadly.
Moreover, the interest rate outlook abroad has shifted materially higher. Market expectations for policy rates across Norway's trading partners are around 60 basis points higher next year than they were in June. Against this backdrop, Norges Bank risks renewed weakness in the krone if it is perceived as soft.
While the statement should continue to leave the door open to additional tightening, we suspect that today’s move might be the last one for this cycle. The market has priced in more 25bp hike by March of next year.
Figure 2: Underlying CPI Inflation has Remained Elevated
Source: Datastream and CE
Figure 3: Wage Growth in the Economy
Source: Datastream/CE