Rate decision March 2024
At its meeting on 20 March 2024, the Committee decided to keep the policy rate unchanged at 4.5 percent.
Policy rate kept unchanged at 4.5 percent
Norges Bank’s Monetary Policy and Financial Stability Committee decided to keep the policy rate unchanged at 4.5 percent at its meeting on 20 March.
“The policy rate will likely need to be maintained at the current level for some time ahead in order to bring inflation back to the 2 percent target within a reasonable time horizon”, says Governor Ida Wolden Bache.
Monetary policy is having a tightening effect, and growth in the Norwegian economy is low. Price inflation is slowing but is still markedly above target. Business costs have increased sharply over the past years, and high wage growth and the krone depreciation through 2023 will contribute to keeping inflation elevated ahead.
Since the December 2023 Monetary Policy Report, activity in the Norwegian economy has been higher than projected, and price inflation has been lower than projected. In its assessment of the interest rate outlook, the Committee was concerned with the possibility that if the policy rate is lowered prematurely, inflation could remain high, among other things, because the krone might then weaken. On the other hand, an overly tight monetary policy could restrain the economy more than needed. The Committee judges that a policy rate path broadly consistent with the forecast in the previous Report provides a reasonable trade-off between the objectives of monetary policy.
The current forecast indicates that the policy rate will continue to lie at 4.5 percent in the period to autumn before gradually moving down. Economic growth is projected to remain low through the first half of 2024 before picking up. Unemployment will likely edge up, but a little less than anticipated in December. Inflation is projected to slow somewhat faster in 2024 than projected earlier and to approach 2 percent towards the end of 2027.
There is uncertainty about future developments in the Norwegian economy. In its discussion of the balance of risks, the Committee was concerned with the wide differences across industries, and their effect on the economic outlook. If cost inflation remains elevated or the krone turns out to be weaker than projected, inflation may remain high for longer than currently projected. In that case, the Committee is prepared to raise the policy rate again. If there is a more pronounced slowdown in the Norwegian economy or inflation declines more rapidly, the policy rate may be lowered earlier than currently envisaged.
Norges Bank will hold a press conference following the monetary policy decision in May.
Rate effective from 22 March 2024:
- Policy rate: 4.5 %
- Overnight lending rate: 5.5 %
- Reserve rate: 3.5 %
Contact:
Press telephone: +47 21 49 09 30
Email: presse@norges-bank.no
28:08
Press conference in connection with the policy rate decision 21 March 2024
Policy rate will likely be held steady for some time
Introductory statement by Governor Ida Wolden Bache at the press conference following announcement of the policy rate on 21 March 2024.
Chart: Policy rate kept unchanged at 4.5 percent
Norges Bank’s Monetary Policy and Financial Stability Committee announced today its decision to keep the policy rate unchanged at 4.5 percent.
Norges Bank is tasked with keeping inflation low and stable. The operational target is inflation of close to 2 percent over time. We are also mandated to help keep employment as high as possible and to promote economic stability.
Inflation is markedly above the target. High and variable inflation imposes substantial costs on society. Those with the smallest margins are often hardest hit when prices rise rapidly and unexpectedly.
In recent years, the policy rate has been raised significantly in order to tackle high inflation. We now see that the monetary policy tightening is working. Inflation is falling back and the economy is cooling down.
The Committee assesses that the policy rate is now sufficiently high to bring inflation back to the target within a reasonable time horizon. That does not mean that the job is done. We still have a way to go before inflation returns to the 2 percent target. If the policy rate is lowered prematurely, inflation could remain high, among other things, because the krone might then depreciate.
Inflation has been lower than anticipated in December, when we last presented our projections. At the same time, activity in the Norwegian economy has been higher than projected. Therefore, we are now more confident that we can bring down inflation without a pronounced rise in unemployment.
Let me say a little more about the background for the rate decision and the Committee’s assessments.
Chart: Inflation markedly above target
Inflation has moderated over the past months and is now just below 5 percent. While prices are normally raised in the grocery sector in February, this is the first year we registered a fall in food prices since February 2001. Energy prices have also been lower than assumed.
Inflation is still broad based. Over the past half year, goods prices have risen at a slower pace, while the services inflation has remained high.
Chart: Low growth in the Norwegian economy
Growth in the Norwegian economy is low. Norges Bank’s Regional Network enterprises overall expect activity to remain steady in the period to summer. Firms supplying goods and services to the petroleum sector are still prospering owing to strong investment growth, while the construction industry expects a further decline. Activity in the retail trade sector is set to edge down a little ahead, but more retail firms now report that prospects have improved.
Given the wide differences across industries, the outlook for the Norwegian economy is uncertain. Among other things, it is uncertain to what extent weak activity in the construction industry will affect other sectors. It is also uncertain how overall wage growth will be affected by the large differences in profitability both within manufacturing and among different sectors.
Over the past few years, the labour market has become less tight. Network enterprises report that recruitment difficulties have eased. At the same time, employment is still high. Over the past year, the number of employed has increased by close to 20 000. Registered unemployment remains low and has been a little lower than expected in December.
Chart: Inflation has come down abroad
International inflation has declined markedly since peaking in 2022, but the decline has stalled a bit in recent months. Goods inflation has fallen most, while services inflation is still high in many countries. Central banks in our main trading partner countries have held policy rates steady in recent months, and the market now expects the interest rate loosening cycle to begin this summer.
The krone strengthened after the monetary policy meeting in December and has been stronger than projected earlier, likely reflecting a larger rise in Norwegian market interest rates than trading partner interest rates.
We do not have a policy target for the krone exchange rate, but we are concerned with the krone exchange rate because it affects the outlook for the Norwegian economy. Over the past year and a half, the krone has lost considerable value. A weaker krone means higher prices for imported goods. The past krone depreciation will continue to contribute to keeping inflation elevated ahead.
Chart: Wage growth is high
It may take time for inflation to return to target also due to other factors. Labour costs have shown a substantial increase in recent years. Combined with higher intermediate goods prices, Norwegian firms are facing high cost inflation. Strong demand has made it possible to pass on higher costs to prices, and we see that the rise in labour costs has increasingly contributed to the rise in prices.
Last year, wage growth reached 5.2 percent, or the highest rate recorded in 15 years. Even so, wage inflation was lower than price inflation. Wage growth is expected to be high this year too, but to slow to 4.9 percent.
Chart: Policy rate will likely be held steady for some time
The Committee assesses that the policy rate needs to be maintained at the current level for some time ahead. A policy rate path broadly consistent with the forecast in the December Report provides a reasonable balance between the monetary policy objectives. If the economy evolves as projected in this Report, the policy rate will be held steady in the period to autumn before it is gradually lowered.
Chart: Inflation will move down and unemployment edge up
We now expect an improvement in the Norwegian economy ahead compared with the outlook in December. With the current path of the policy rate, inflation is projected to come down faster this year and to approach target in the course of the coming years. Unemployment is expected to increase somewhat, but the number of unemployed is expected to be somewhat lower than projected in December. Wage growth is set to edge lower, but given the decline in price inflation, it is still likely that wages will rise faster than prices in the years ahead.
There is uncertainty about future developments in the Norwegian economy. If the rapid increase in business costs persists or the krone turns out to be weaker than projected, inflation may remain elevated for longer than currently projected. In that case, the Committee is prepared to raise the policy rate again. If there is a more pronounced slowdown in the Norwegian economy or inflation declines more rapidly, the policy rate may be lowered earlier.
We know that the steep series of interest rate increases has a cost. The interest rate rise has come on top of a sharp rise in prices. Many people have less money to spend, and for some of them it has become difficult to make ends meet. It is likely that no further rate increases will be needed. Many people will see an increase in their purchasing power and a lighter debt burden. Even so, we must be prepared for somewhat higher unemployment and for a continued decline in activity in certain industries for a while ahead. But given the current outlook, inflation will return to target without a sharp rise in unemployment.
Monetary policy assessment
At its meeting on 20 March, Norges Bank's Monetary Policy and Financial Stability Committee decided to keep the policy rate unchanged at 4.5 percent. Based on the Committee's current assessment of the outlook and balance of risks, the policy rate will likely be kept at that level for some time ahead.
Lower international inflation
Consumer price inflation among Norway's main trading partners slowed through 2023 but is still higher than central banks’ 2% target. Goods inflation has continued to fall since the December Report, while services inflation has remained elevated. Underlying inflation among trading partners has slowed broadly in line with projections. Gas and electricity prices have also declined, and futures prices are lower than in December. Oil prices, on the other hand, have risen since the December Report. Tensions in the Red Sea have led to an increase in freight rates for shipping goods from Asia to Europe, but rates are still appreciably lower than in the wake of the pandemic.
Overall economic growth among trading partners was low in 2023, and economic pressures receded. In 2023 Q4, activity was slightly higher than projected in the December Report. The US economy experienced strong growth, while growth was close to zero among a host of Norway's European trading partners. Unemployment has remained low.
Consumer prices. Twelve-month change. Percent
Source: LSEG Datastream
Higher policy rate expectations and a stronger krone
Central banks among Norway’s main trading partners have held policy rates steady since December. The market expects the first policy rate cuts to occur somewhat later than anticipated earlier. Market pricing now indicates that central banks will begin lowering rates this summer. Long-term government bond yields have shown little change since the December Report, while equity indexes have increased in many countries.
Policy rate expectations in Norway have risen since December. Market pricing now indicates that the policy rate will be lowered in the course of autumn. Market interest rates have risen more in Norway than abroad. The krone has appreciated more than projected. Norwegian money market premiums have fallen and are lower than projected.
Import-weighted exchange rate index. I-44
Source: Norges Bank
Less pressure in the Norwegian economy
Growth in the Norwegian economy is low. Economic growth slowed through 2023, reflecting a decline in household consumption and a sharp fall in housing investment. Mainland GDP has been stronger than projected in the December Report. Household consumption and public demand have both been higher than expected. On the other hand, housing investment has shown a steep fall and been lower than expected.
GDP for mainland Norway. Three-month moving average. Percent
Sources: Statistics Norway and Norges Bank
Pressures in the Norwegian economy have receded, and overall output is now likely close to potential. After having risen to a high level after the pandemic, the employment rate has edged down over the past year but the level of employment has been higher than projected in the December Report. Unemployment has ticked up slightly over the past year. Registered unemployment remained unchanged at 1.9% in February. The Labour Force Survey indicator has been weaker in recent months than other labour market indicators. Norges Bank’s Regional Network contacts report that recruitment difficulties have gradually diminished over the past two years. The share of enterprises reporting labour shortages as a constraint on production showed little change between Q4 and Q1.
Capacity utilisation and labour shortages according to the Regional Network. Percentage shares
Source: Norges Bank
Overall, Regional Network enterprises expect activity to remain broadly unchanged in the period to summer, but there are wide differences across industries. Vigorous investment in the petroleum industry is still underpinning growth in the oil services industry, and service industries expect activity to increase ahead. Both retail trade and the construction industry expect a further fall in activity in Q2, but a rising number of retail enterprises now signal slightly improved prospects. New home sales are still at a very low level. In the secondary market, house prices have risen and been higher than projected. The stock of unsold homes has declined but is still higher than a historical average.
In the projections, growth in the Norwegian economy is low through the first half of 2024, but activity appears to be slightly higher than projected in the December Report. Growth in household consumption remains weak through the latter half of the year, before picking up over summer. New home sales gradually pick up, and housing investment shows a renewed rise in the latter half of the year. Strong petroleum investment, a further rise in exports and high public demand contribute to sustaining activity in the Norwegian economy in 2024. Total output is expected to fall to somewhat below potential.
Inflation remains high
Inflation has slowed further since the December Report but is still high. In February, the 12-month rise in the overall consumer price index (CPI) was 4.5%, lower than projected. The average of different indicators of underlying inflation fell further between January and February. The 12-month rise in the CPI adjusted for tax changes and excluding energy products (CPI-ATE) was 4.9% in February, also lower than projected. Goods inflation has slowed, while services inflation has remained elevated in recent months.
Price inflation appears to be lower in 2024 than projected earlier, partly reflecting somewhat weaker international price impulses to Norwegian consumer goods. In addition, a stronger-than-projected krone and lower energy prices will push down inflation ahead.
Wage growth increased to 5.2% in 2023, lower than projected. Norges Bank’s Regional Network and Expectations Survey both indicate higher wage expectations for 2024, and the social partners expect average wage growth of around 5%. In the projections in this Report, annual wage growth is put at 4.9% in 2024.
According to the Expectations Survey, long-term inflation expectations are still higher than the inflation target of 2%, and expectations increased a little in Q1.
CPI and CPI-ATE. Twelve-month change. Percent
Source: Statistics Norway
Unchanged policy rate at 4.5%
The objective of monetary policy is annual consumer price inflation of close to 2% over time. Inflation targeting shall be forward-looking and flexible so that it can contribute to high and stable output and employment and to counteracting the build-up of financial imbalances.
The Committee assesses that the policy rate needs to be maintained at the current level for some time ahead in order to bring inflation back to target within a reasonable time horizon. Monetary policy is having a tightening effect, and growth in the Norwegian economy is low. Price inflation is slowing but is still markedly above target. Business costs have increased sharply over the past years, and high wage growth and the krone depreciation last year will contribute to keeping inflation elevated ahead.
Since the December Report, activity in the Norwegian economy has been higher than projected, and price inflation has been lower than projected. In its assessment of the interest rate outlook, the Committee was concerned with the possibility that if the policy rate is lowered prematurely, inflation could remain high, among other things, because the krone might then weaken. On the other hand, an overly tight monetary policy could restrain the economy more than needed. The Committee judges that a policy rate path broadly consistent with the forecast in the previous Report provides a reasonable trade-off between the objectives of monetary policy.
The forecast in this Report indicates that the policy rate will continue to lie at 4.5 percent in the period to autumn before gradually moving down. Economic growth is projected to remain low through the first half of 2024 before picking up. Unemployment will likely edge up, but a little less than anticipated in December. Inflation is projected to slow somewhat faster in 2024 than projected earlier and to approach 2% towards the end of 2027.
Sources: Statistics Norway and Norges Bank
There is uncertainty about future developments in the Norwegian economy. In its discussion of the balance of risks, the Committee was concerned with the wide differences across industries, and their effect on the economic outlook. If cost inflation remains elevated or the krone turns out to be weaker than projected, inflation may remain high for longer than currently projected. In that case, the Committee is prepared to raise the policy rate again. If there is a more pronounced slowdown in the Norwegian economy or inflation declines more rapidly, the policy rate may be lowered earlier than currently envisaged.
The Committee decided unanimously to keep the policy rate unchanged at 4.5%. Based on the Committee's current assessment of the outlook and balance of risks, the policy rate will likely be kept at that level for some time ahead.
Ida Wolden Bache
Pål Longva
Øystein Børsum
Ingvild Almås
Steinar Holden
20 March 2024
Monetary Policy Report 1/2024
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- Monetary Policy Report
- Number:
- 1/2024
