“Inflation has declined since the monetary policy meeting in March, and the inflation outlook for the coming year indicates lower inflation than previously expected. A cautious normalisation of the policy rate will pave the way for inflation to return to target without restricting the economy more than necessary,” says Governor Ida Wolden Bache. 

The policy rate was raised significantly to tackle high inflation and has stood at 4.5 percent since December 2023. The tightening of monetary policy has contributed to cooling down the Norwegian economy and to dampening inflation. Inflation has fallen in recent years but is still above target. At the same time, unemployment has increased somewhat from a low level. The output gap has narrowed, and output is now close to potential.  

The Committee judges that a restrictive monetary policy is still needed but that it is now appropriate to begin a cautious normalisation of the policy rate. At the monetary policy meeting in March, the Committee’s assessment was that the policy rate would most likely be reduced in the course of 2025. Inflation is still above target, and the recent years’ high growth in costs will likely stoke inflation for a period ahead. Since March, underlying inflation has declined somewhat faster than expected, and the inflation outlook for the coming year indicates somewhat lower inflation than previously expected. The Committee judges that a cautious normalisation of the policy rate will pave the way for inflation to return to target without restricting the economy more than necessary. 

The policy rate forecast in this Report declines to just below 4 percent at the end of 2025 and to about 3 percent towards the end of 2028. The forecast is little changed from the previous Report but is slightly lower in the near term and slightly higher further out in the projection period. Registered unemployment is expected to increase slightly to around pre-pandemic levels. Inflation is projected to move down and be close to 2 percent in 2028.

“The average residential mortgage rate is projected to decrease from the current rate of 5.6 percent to 4.6 percent in 2028. We do not foresee a decrease in interest rates back to the levels seen in the decade prior to the pandemic,” says Governor Ida Wolden Bache.  

The uncertainty surrounding the outlook is greater than normal. An escalation of conflicts between countries and uncertainty about future trade policies may result in renewed financial market turbulence and could impact both Norwegian and international growth prospects. If the economy takes a different path than currently envisaged, the policy rate path may also differ from that implied by the forecast. If prospects suggest that wage and price inflation will remain elevated for longer than projected, a higher policy rate than currently envisaged may be required. If inflation falls faster than projected, or unemployment rises more than projected, the policy rate may be reduced faster.

“The uncertainty surrounding the economic outlook is now greater than normal. If the economy takes a different path than currently envisaged, the policy rate path may be adjusted. But our objectives stand firm. We will finish the job and ensure that inflation is brought all the way back to 2 percent,” says Governor Ida Wolden Bache.

The August policy rate decision will be presented at an event during “Arendalsuka” on 14 August.