Rate decision December 2022
At its meeting on 14 December 2022, the Committee decided to raise the policy rate by 0.25 percentage point to 2.75 percent
Policy rate raised to 2.75 percent
Norges Bank's Monetary Policy and Financial Stability Committee has unanimously decided to raise the policy rate by 0.25 percentage point to 2.75 percent. Based on the Committee's current assessment of the outlook and balance of risks, the policy rate will most likely be raised further in the first quarter of next year.
The Committee assesses that a higher policy rate is still needed to dampen inflation. Consumer prices have risen rapidly, and inflation is markedly above target. Activity in the Norwegian economy is still high, and unemployment has remained very low. At the same time, the economy is slowing down, and higher inflation is reducing household purchasing power. An easing of economic pressures will help curb inflation further out.
Since the September Report, inflation has been higher than projected and is expected to remain high for longer than previously projected. At the same time, the labour market appears to be a little tighter than anticipated. On the other hand, the policy rate has been raised considerably over a short period of time, and monetary policy has started to have a tightening effect on the economy. There are signs that the slowdown may prove somewhat more pronounced than envisaged in September.
The future path of the policy rate will depend on economic developments.
"The forecasts for the Norwegian economy are more uncertain than normal, but if the economy evolves as anticipated, the policy rate will be around 3 percent next year", says Governor Ida Wolden Bache.
If the pressures in the economy persist, and signs emerge that inflation will remain high for longer than currently projected, a higher policy rate may be needed than currently envisaged. If inflation falls faster or unemployment rises more than projected, the policy rate may be lower than projected.
Norges Bank will hold a press conference following the monetary policy meeting in January.
Rate effective from 16 December 2022:
- Policy rate: 2.75 %
- Overnight lending rate: 3.75 %
- Reserve rate: 1.75 %
Contact:
Press telephone: +47 21 49 09 30
Email: presse@norges-bank.no
Inflation is too high
Introductory statement by Governor Ida Wolden Bache at press conference following announcement of the policy rate.
Chart 1: Policy rate raised from 2.5 to 2.75 percent
Norges Bank's Monetary Policy and Financial Stability Committee has unanimously decided to raise the policy rate by 0.25 percentage point to 2.75 percent.
Norges Bank’s task is to keep 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 over time.
Chart 2: Inflation is too high
Consumer price inflation is now markedly above the target of 2 percent. In November, the 12-month rise in the consumer price index was 6.5 percent. High energy prices have been a key driver of inflation, but prices are rising rapidly across a range of goods and services, both for domestically produced goods and imported goods. Inflation has been higher than projected and is expected to remain higher in the coming months than projected in September, when we published forecasts the last time.
Price stability is crucial for maintaining a well-functioning economy. Many are now finding it challenging to cope with rapid and unexpected price increases. High inflation erodes purchasing power, and those with low incomes and tight margins are being hardest hit. Our aim is to reduce inflation by raising the policy rate.
Chart 3: Very high inflation among our trading partners
Inflation is also high among our trading partners, although it appears that inflation may now have passed the peak in some countries, including the US. At the same time, global freight rates have fallen markedly, and global supply chain constraints appear to have eased. In response to the surge in inflation, many central banks have raised their policy rates to the highest levels seen in more than a decade. Unemployment remains low in many countries, but we believe that high inflation and higher interest rates will lead to weak economic developments among Norway's trading partners ahead.
Chart 4: Slowdown in the Norwegian economy
In Norway, the employment rate is high, and the unemployment rate is very low. Economic activity has held up better through 2022 than we had expected.
We are now seeing a slowdown in the economy. A large number of enterprises in our Regional Network expect a decline in activity ahead. Companies are finding it easier to recruit staff. House prices have fallen and are expected to fall further in the period to autumn next year. An easing of pressures in the economy will contribute to curbing inflation further ahead.
Wage growth appears to be higher this year than in 2021, and is expected to increase further next year, in line with the expectations of the social partners. This year, however, inflation is set to be appreciably higher than wage growth. Next year, wages and prices are expected to rise approximately at the same pace.
Chart 5: The policy rate will most likely be raised further in the first quarter 2023
We have raised the policy rate considerably over a short period of time. Monetary policy has started to have a tightening effect, and we have not yet seen the full effect of the rate hikes.
When setting the policy rate, we are concerned with balancing the risk of tightening too much against the risk of tightening too little.
Inflation is high and inflation expectations ahead have increased. If we raise the policy rate too little, inflation could remain high for a longer period. This could increase the risk that households and firms become used to high inflation and adjust their price and wage setting behaviour accordingly. It may then be necessary to tighten even further at a later stage in order to bring down inflation.
If we raise the policy rate too much, the economy will contract more than what is necessary to bring down inflation, which is something we want to avoid. We believe that we best balance these considerations by raising the policy rate now.
High inflation is weakening household purchasing power. In the short term, higher interest rates also entail tighter finances for borrowers. I am aware that the situation is now demanding for some people. And I understand that it may be thought that we are adding to the weight of the burden by raising the policy rate in a situation where inflation is already high. But by raising the policy rate, we are pushing down inflation.
The future policy rate path will depend on economic developments. Most likely, the policy rate will be raised further in the first quarter of next year. If the economy evolves as anticipated, the policy rate will be around 3 percent next year. This implies a mortgage rate of between 4 and 4½ percent.
Chart 6: Inflation falls and unemployment edges up
Inflation is projected to remain high in the near term but will begin to drift down in the course of next year and approach the inflation target further out. Household consumption is likely to decline next year, and unemployment edges up, albeit from a low level.
The outlook is more uncertain than normal. The economy has been hit by major shocks in recent years, and there may have been changes in economic relationships.
We are uncertain about the extent to which households in Norway will tighten consumption when incomes are not keeping pace with inflation. The effect of high inflation on wage and price setting behaviour is also uncertain.
If pressures in the economy persist, and signs emerge that inflation will remain high for a longer period, a higher policy rate may be needed than currently envisaged. If inflation slows more rapidly or unemployment becomes higher than expected, the interest rate may be lower than projected.
The Committee has also taken its decision on the countercyclical capital buffer. In March, the decision was made to raise the countercyclical capital buffer rate to 2.5 percent, effective from 31 March 2023. Norges Bank’s Monetary Policy and Financial Stability Committee has decided to maintain this requirement.
The countercyclical capital buffer requirement strengthens banks’ solvency, and thereby their resilience to shocks.
32:29
Press conference in connection with policy rate decision December 2022 (In Norwegian)
Monetary policy assessment
Consumer prices have risen rapidly, and inflation is markedly above target. Activity in the Norwegian economy is still high, and unemployment has remained very low. At the same time, the Norwegian economy is slowing down.
Since the September Monetary Policy Report, inflation has been higher than projected and is expected to remain high for longer than previously projected. At the same time, the labour market appears to be a little tighter than anticipated. On the other hand, the policy rate has been raised considerably over a short period of time, and monetary policy has started to have a tightening effect on the economy. There are signs that the slowdown may prove somewhat more pronounced than envisaged in September.
Norges Bank’s Monetary Policy and Financial Stability Committee decided to raise the policy rate from 2.5% to 2.75% at its meeting on 14 December. Based on the Committee’s current assessment of the outlook and balance of risks, the policy rate will most likely be raised further in 2023 Q1.
High inflation and weaker global growth outlook
Elevated energy prices, strong demand and supply side constraints have led to high global inflation over the past year, but consumer price inflation may now have passed the peak in some countries, such as the US. Futures prices indicate that both gas and electricity prices will remain high over the coming year but will fall thereafter. Other commodity prices have edged down over the past six months, and global supply chain disruptions appear to have eased. Global freight rates have shown a marked decline.
Øre/KWh
Source: Refinitiv Datastream
Central banks in many trading partner countries have responded to the surge in inflation by raising policy rates to the highest levels seen in more than a decade. Labour markets are tight, but the fall in unemployment appears to have come to a halt in some countries. Wage growth has accelerated and is expected to remain high next year. Economic activity among our trading partners has been slightly higher than projected in the September Report, but forward-looking indicators point to weaker growth ahead. High inflation and higher interest rates are expected to curb consumption growth. At the same time, high energy prices have prompted some European companies to scale back production. GDP growth among our trading partners is expected to be low next year.
Policy rates and estimated forward rates in selected countries. Percent
Sources: Bloomberg, Refinitiv Datastream and Norges Bank
Volatile financial markets
Financial markets have been highly volatile since the September Report. Market-based expectations of global policy rates are a little higher in the near term but indicate expectations of a gradual moderation in the pace of policy rate hikes over the next year.
The krone exchange rate has fluctuated considerably in recent months but is now broadly in line with the projections in the September Report. The volatility in financial markets is adding to the uncertainty about movements in the krone exchange rate ahead. The expected path of Norway’s policy rate has fallen since September. Higher money market premiums have pushed up corporate borrowing costs. The rise in mortgage lending rates has been broadly as expected.
High activity in the Norwegian economy, but prospects for weaker growth ahead
Activity in the Norwegian economy has been higher through 2022 than previously assumed, and mainland GDP has increased faster in recent months than expected. High inflation and higher interest rates have reduced household purchasing power, but consumption has so far remained higher than projected in the September Report.
GDP for mainland Norway. Seasonally adjusted. Index. February 2020 = 100
Sources: Statistics Norway and Norges Bank
The labour market is tight. Employment has continued to rise, and unemployment has remained very low. Seasonally adjusted registered unemployment was 1.6% in November, which was slightly lower than projected in the September Report. There are still considerable labour shortages, but shortages are easing. The share of enterprises in Norges Bank’s Regional Network reporting that labour shortages are limiting output fell further in November. The number of job vacancies has also decreased.
Capacity utilisation and labour shortages according to the Regional Network. Percentage shares
Source: Norges Bank
Regional Network enterprises on the whole expect a marked decline in output over the next half year. Enterprises expect lower demand ahead, on the back of high price and cost inflation, higher interest rates and a decline in public sector projects.
The housing market has turned. House prices have fallen faster than projected, and the number of unsold homes has increased markedly. House prices are expected to fall further in the period to autumn 2023. A reduction in household wealth due to a fall in house prices, combined with the prospect of a notable decline in household real disposable income in 2023, pushes down consumption between 2022 and 2023. The household saving ratio is declining, and saving is expected to remain low ahead.
Activity in the Norwegian economy is projected to fall in the near term. Higher inflation and a weaker housing market are expected to contribute to a more rapid cooling of the Norwegian economy than envisaged in September. Substantial investments in the petroleum industry and activities related to climate transition are expected to lift activity somewhat further ahead.
Prospects of high inflation for a longer period
Inflation in Norway is high and appreciably higher than projected in the September Report. In November, the 12-month rise in the consumer price index (CPI) was 6.5%. Energy and food prices in particular have risen sharply over the past year, but prices across a range of other goods and services have also risen more than normal. The 12-month rise in the consumer price index adjusted for tax changes and excluding energy products (CPI-ATE) has moved up and stood at 5.7% in November. Prices for both imported goods and domestically produced goods and services are rising at a fast pace. Other indicators of underlying inflation have also edged higher. Inflation is expected to remain higher in the period ahead than previously projected.
According to Norges Bank’s Expectations Survey, inflation expectations for the coming years have increased recently. Long-term inflation expectations increased further in 2022 Q4 and are above the 2% target.
Wage growth is set to be higher in 2022 than in 2021, partly reflecting labour market tightness. Register-based wage statistics indicate that wage growth in the first three quarters of 2022 may have been slightly lower than projected. The projection for wage growth in 2022 has been revised down to 3.9%, implying a sharp decline in real wages. Norges Bank’s Expectations Survey indicates that wage growth expectations for 2023 have increased since September, and nominal wage growth is expected to show a marked increase in 2023.
CPI and CPI-ATE. Twelve-month change. Percent
Source: Statistics Norway
Need for higher interest rates in the Norwegian economy
The operational target 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 countering the build-up of financial imbalances.
The Committee assesses that a higher policy rate is still needed to dampen inflation. Consumer prices have risen rapidly, and inflation is markedly above target. Activity in the Norwegian economy is still high, and unemployment has remained very low. At the same time, the economy is slowing down, and higher inflation is reducing household purchasing power. An easing of economic pressures will help curb inflation further out.
Since the September Report, inflation has been higher than projected and is expected to remain high for longer than previously projected. At the same time, the labour market appears to be a little tighter than anticipated. On the other hand, the policy rate has been raised considerably over a short period of time, and monetary policy has started to have a tightening effect on the economy. There are signs that the slowdown may prove somewhat more pronounced than envisaged in September.
Sources: Statistics Norway and Norges Bank
The policy rate forecast indicates a policy rate of around 3% in 2023, slightly higher than in the previous Report. In the projections, inflation falls and approaches the inflation target further out. The output gap falls, and output stays somewhat below potential in the coming years. Unemployment then increases somewhat, albeit from a low level.
In its discussion, the Committee was concerned with higher-than-normal uncertainty surrounding the forecasts for the Norwegian economy. There is uncertainty associated with households’ response to higher inflation and increased interest rates, and the potential effects of high inflation on wage and price formation. The future path of the policy rate will depend on economic developments. If the pressures in the economy persist, and signs emerge that inflation will remain high for longer than currently projected, a higher policy rate may be needed than currently envisaged. If inflation falls faster or unemployment rises more than projected, the policy rate may be lower than projected.
The Committee decided unanimously to raise the policy rate by 0.25 percentage point to 2.75%. Based on the Committee’s current assessment of the outlook and balance of risks, the policy rate will most likely be raised further in 2023 Q1.
Ida Wolden Bache
Pål Longva
Øystein Børsum
Ingvild Almås
Jeanette Fjære-Lindkjenn
14 December 2022
Monetary Policy Report with financial stability assessment 4/2022
Read the report (web edition)- Series:
- Monetary Policy Report
- Number:
- 4/2022
In the version of MPR and the associated data for annex that was published at 10 a.m., there was an error in annex table 3. The forecast for GDP growth in 2023 was stated at -0.1. The correct number is -0.2. The error has now been corrected.
Countercyclical capital buffer unchanged
In March, the decision was made to raise the countercyclical capital buffer rate to 2.5 percent, effective from 31 March 2023. Norges Bank’s Monetary Policy and Financial Stability Committee has decided to maintain this requirement.
Property prices have risen substantially in recent years, and many households are highly indebted. Such vulnerabilities may amplify an economic downturn. In autumn, residential and commercial property prices have fallen, and they are expected to fall further. Creditworthy firms and households appear to have ample access to credit, even if there are some signs of a tightening of banks’ credit standards.
Norwegian banks satisfy the capital requirements and are highly profitable. Bank losses are expected to be low ahead. Analyses in Financial Stability Report 2022 show that banks are resilient and able to absorb losses and maintain lending in a severe economic downturn.
“The countercyclical capital buffer rate of 2.5 percent helps to ensure that banks have ample capacity to absorb losses”, says Governor Ida Wolden Bache.
From 2023, Norges Bank will publish Financial Stability Report twice a year (in May and November). At the same time, the decision on the countercyclical capital buffer will be made at the monetary policy meetings in January, May, August and November. The next decision on the countercyclical capital buffer will be published on 19 January, together with the policy rate decision.
The objective of the countercyclical capital buffer is to strengthen banks’ solvency and mitigate the risk that banks’ lending standards amplify an economic downturn. The countercyclical capital buffer was reduced from 2.5 to 1.0 percent in March 2020. Decisions have been made to raise the buffer rate to 1.5, 2.0 and 2.5 percent, effective from 30 June 2022, 31 December 2022, and 31 March 2023, respectively.