Rate decision September 2023
At its meeting on 20 September 2023, the Committee decided to raise the policy rate by 0.25 percentage point to 4.25 percent.
Policy rate raised to 4.25 percent
Norges Bank's Monetary Policy and Financial Stability Committee decided to raise the policy rate from 4.0 to 4.25 percent at its meeting on 20 September.
“Whether additional tightening will be needed depends on economic developments. There will likely be one additional policy rate hike, most probably in December”, says Governor Ida Wolden Bache.
Inflation is high and markedly above the 2 percent target. Persistently high inflation imposes substantial costs on society. The Committee judges that a somewhat higher interest rate is needed to bring inflation down to target within a reasonable horizon.
Growth in the Norwegian economy has slowed, but the labour market remains tight. Business costs have increased considerably in recent years, and labour costs are expected to increase more than projected earlier. This will contribute to keeping inflation elevated ahead. The longer inflation remains elevated, the greater the risk of it becoming entrenched. It may then prove more costly to bring inflation down again at a later stage. On the other hand, the policy rate has been raised significantly over a short period of time, and monetary policy is now having a tightening effect on the economy. The Committee does not want to raise the policy rate more than is necessary to tackle the high level of inflation.
The policy rate forecast has been revised up a little compared with the June 2023 Monetary Policy Report and indicates that the policy rate will lie around 4.5 percent through 2024.
“There will likely be a need to maintain a tight stance for some time ahead”, says Governor Ida Wolden Bache.
There is uncertainty about future economic developments and the extent of the tightening effect of monetary policy at this juncture. If pressures in the economy persist or the krone turns out to be weaker than projected, inflation could remain high for longer than currently envisaged. In that case, we are prepared to raise the policy rate to a further extent than we project at present. If there is a more pronounced slowdown in the Norwegian economy or inflation declines more rapidly, the policy rate may be lower than currently envisaged.
Norges Bank will hold a press conference following the monetary policy decision in November.
Rate effective from 22 September 2023:
- Policy rate: 4.25 %
- Overnight lending rate: 5.25 %
- Reserve rate: 3.25 %
Contact:
Press telephone: +47 21 49 09 30
Email: presse@norges-bank.no
Need to maintain a tight stance for some time
Introductory statement by Deputy Governor Pål Longva at press conference following announcement of the policy rate on 21 September 2023.
Chart: Policy rate raised to 4.25 percent
Today, Norges Bank's Monetary Policy and Financial Stability Committee announced its decision to raise the policy rate by 0.25 percentage point to 4.25 percent. Whether additional tightening will be needed depends on economic developments. Based on the Committee's current assessment of the outlook and balance of risks, there will likely be one additional policy rate hike, most probably in December.
Chart: Inflation is still markedly above target
Inflation is high. High and variable inflation has substantial costs – to people, businesses and society. Rapid and unexpected price increases hit low-income households in particular and those who can least afford it.
It is our job to bring inflation down. The operational target is inflation of close to 2 percent over time. Over the past year, consumer prices have risen by almost 5 percent. Inflation has receded after peaking last autumn but is still markedly above target. Information we have received in recent months indicates that inflation may remain high longer than envisaged before summer. The longer inflation remains high, the more costly it may prove to bring down inflation at a later stage.
Let me say a bit more about economic developments and the Committee’s assessments:
Chart: Slower growth in the Norwegian economy
There is brisk activity in the Norwegian economy, and the level of employment is high. But monetary policy tightening is now helping to cool down the Norwegian economy, and activity growth has slowed. Growth in household consumption has softened, and unemployment has edged up a little. House prices have declined.
Overall, the enterprises in Norges Bank’s Regional Network expect activity growth to be weak ahead. At the same time, there are wide differences across industries. Oil prices have shown a marked rise, and petroleum investment is set to be higher ahead than expected earlier.
Chart: Rapid rise in prices for many goods and services
Consumer prices have risen rapidly for many goods and services. The jump in inflation was triggered by a surge in some prices, such as energy prices and international freight costs. The rise in prices has gradually spread to a broader range of goods and services.
Last year, we saw a sharp increase in food prices and many other goods, and recently higher rents and services prices have become stronger drivers of inflation. Energy prices are now pushing down on inflation.
International inflation is easing. Global trade flows have normalised, and freight costs have fallen back to pre-pandemic levels. Looking ahead, a slower rise in import prices will dampen inflation in Norway too.
Even though there are forces that are now driving down inflation, we believe it will take time to return inflation to the target. High intermediate goods prices have pushed up business costs, and we believe this will keep inflation high for a while.
Chart: High wage growth
In addition, labour costs are rising fast. This year's pay increases are not large compared with the high rate of inflation, and workers will probably experience a further loss of purchasing power this year. But higher wage growth also means higher business costs.
Next year, wage growth will probably be higher than we expected in June. The social partners have also raised their wage growth expectations for next year. Higher labour costs may lead to higher inflation ahead than envisioned earlier.
Chart: Need to maintain a tight stance for some time
We do not want to raise interest rates more than is necessary to tackle the high level of inflation. We have raised interest rates significantly over a short period of time, and we have not yet seen the full effects of the past rate hikes. We are seeing a slackening of the Norwegian economy. Managing the trade-offs has become more complex.
We believe that we are close to the rate level required to bring inflation down to target. This means that we can take a bit more of a wait-and-see stance.
There will likely be a need to maintain a tight stance for some time ahead. The policy rate forecast has been revised up slightly from June and indicates that the policy rate will lie around 4.5 percent through next year.
Chart: Prospects for lower inflation and somewhat higher unemployment
Higher interest rates and high inflation mean tighter household budgets. For a period ahead, many households will probably have to reduce consumption to make ends meet.
We do not expect a sharp slowdown in the Norwegian economy, but there are prospects that unemployment will edge up. The monetary tightening will drive down inflation ahead, and from next year wages are expected to rise faster than prices again.
There is uncertainty about future economic developments and the extent of the tightening effect of monetary policy. If pressures in the economy persist or the krone weakens, inflation could remain high for longer than envisioned. In that case, the Committee is prepared to raise the policy rate to a further extent than currently envisaged. If there is a more pronounced slowdown in the Norwegian economy or inflation declines more rapidly, the policy rate may be lower.
Either way, the objective remains the same. We will set the policy rate so that inflation stabilises at close to 2 percent. By doing so, we are helping to restore households’ purchasing power and promote high employment and economic stability over time.
20:28
Press conference in connection with the policy rate decision September 2023 (In Norwegian)
Monetary policy assessment
Norges Bank's Monetary Policy and Financial Stability Committee decided to raise the policy rate from 4.0% to 4.25% at its meeting on 20 September. Whether additional tightening will be needed depends on economic developments. Based on the Committee's current assessment of the outlook and balance of risks, there will likely be one additional policy rate hike, most probably in December.
International inflation recedes but remains high
Consumer price inflation among Norway's main trading partners has fallen appreciably in recent months but is still above central bank targets of 2%. Underlying inflation remains high and has been approximately as projected in the June 2023 Monetary Policy Report. Oil prices have risen since June, and the spot price is now around USD 95 per barrel. Gas prices are little changed.
Central banks internationally have raised their policy rates significantly since the spring of last year, and a number of central banks raised interest rates further through summer. Many central banks highlight the fact that monetary policy is now having a tightening effect on the economy. Since June, both policy rate expectations and long-term government bonds yields have continued upwards for Norway’s main trading partners. Market pricing indicates expectations that policy rates abroad will be kept close to today's level in the coming year.
Policy rates and estimated forward rates. Percent
Sources: Bloomberg, Refinitiv Datastream and Norges Bank
Economic growth among our trading partners has slowed broadly in line with the projections in the June Report. Capacity utilisation has fallen, but labour markets are still tight. Higher interest rates and high inflation are curbing economic activity, and growth is expected to be subdued over the next year. International growth prospects are somewhat weaker than projected in June, in particular for China.
Somewhat stronger krone
The krone appreciated through summer and has been somewhat stronger than projected in the June Report. The appreciation has coincided with a rise in oil prices and higher interest rates in Norway. Market pricing indicates expectations of a somewhat higher policy rate relative to today’s level of 4%. Interest rates on loans to businesses have risen further since June, and the rise in the average mortgage rate has been broadly in line with expectations.
Import-weighted exchange rate index. I-44
Sources: Bloomberg and Norges Bank
Pressures in the Norwegian economy ease, but labour market remains tight
Growth in the Norwegian economy has slowed since last autumn. Mainland GDP has been broadly in line with the June projection. Growth in household consumption has slackened, but less than expected.
GDP for mainland Norway. Seasonally adjusted. Index. February 2020 = 100
Sources: Statistics Norway and Norges Bank
The labour market is still tight. Employment has been higher than expected, and unemployment is low. At the same time, there are signs that the labour market is loosening. The employment rate has edged down a little, and the number of unemployed has risen slightly. The share of enterprises in Norges Bank’s Regional Network reporting that labour shortages are a constraint on production showed little change between Q2 and Q3, after declining since spring 2022. Overall capacity utilisation in the Norwegian economy appears to have fallen but has been somewhat higher than projected in June.
Capacity utilisation and labour shortages according to the Regional Network. Percentage shares
Source: Norges Bank
Overall, Regional Network contacts expect an upturn in activity in Q4, but there are wide differences across industries. Growth in oil services is strong thanks to vigorous investment in the petroleum industry. Contacts report that softer household demand and low new home sales are depressing activity in retail trade, construction and manufacturing. The number of unsold existing homes has increased, and house prices have drifted down and been lower than expected.
The rise in interest rates and high inflation will continue to restrain growth in the Norwegian economy ahead. Household consumption and housing investment are expected to contract this year. On the other hand, strong petroleum investment and export growth will support activity in the Norwegian economy in both 2023 and 2024.
Inflation remains markedly above target
Consumer price inflation (CPI) has drifted down through summer, reflecting a sharp drop in electricity prices, but CPI inflation remains high. The 12-month rise in the CPI moved down to 4.8% in August and was lower than projected in the June Report. The average of different underlying inflation indicators has edged down a little since the June Report. The 12-month rise in the CPI adjusted for tax changes and excluding energy products (CPI-ATE) was 6.3% in August, approximately as projected.
Wage growth is projected at 5.5% in 2023, unchanged from the June Report. The rise in oil prices will boost profitability in parts of manufacturing. Combined with prospects for higher capacity utilisation and a somewhat faster rise in prices than expected, wage growth is set to be higher in 2024 than projected earlier. Both Norges Bank's Expectations Survey and Regional Network surveys indicate an increase in wage expectations for 2024.
Weaker international inflationary pressures and lower energy prices will curb inflation ahead. On the other hand, higher labour costs and a rapid rise in prices for many intermediate goods will contribute to keeping price inflation elevated.
The expectations survey shows that inflation expectations one to two years ahead have continued to drift upwards a little. Long-term inflation expectations still lie above the 2% target.
CPI and CPI-ATE. Twelve-month change. Percent
Source: Statistics Norway
Policy rate raised to 4.25%
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 counteracting the build-up of financial imbalances.
Inflation is high and markedly above target. Persistently high inflation imposes substantial costs on society. The Committee judges that a somewhat higher interest rate is needed to bring inflation down to target within a reasonable horizon.
Growth in the Norwegian economy has slowed, but the labour market remains tight. Business costs have increased considerably in recent years, and labour costs are expected to increase more than projected earlier. This will contribute to keeping inflation elevated ahead. The longer inflation remains elevated, the greater the risk of it becoming entrenched. It may then prove more costly to bring inflation down again at a later stage. On the other hand, the policy rate has been raised significantly over a short period of time, and monetary policy is now having a tightening effect on the economy. The Committee does not want to raise the policy rate more than is necessary to tackle the high level of inflation.
There will likely be a need to maintain a tight stance for some time ahead. The policy rate forecast has been revised up a little compared with the June forecast and indicates that the policy rate will lie around 4.5% through 2024. Economic growth is projected to remain subdued over the next year, before picking up again. Unemployment is expected to edge up. Inflation is projected to recede and approach the target somewhat further out.
Sources: Statistics Norway and Norges Bank
There is uncertainty about future economic developments and the extent of the tightening effect of monetary policy at this juncture. If pressures in the economy persist or the krone turns out to be weaker than projected, inflation could remain high for longer than currently envisaged. In that case, the Committee is prepared to raise the policy rate to a further extent than projected in this Report. If there is a more pronounced slowdown in the Norwegian economy or inflation declines more rapidly, the policy rate may be lower than currently envisaged.
The Committee decided unanimously to raise the policy rate by 0.25 percentage point to 4.25% at its meeting on 20 September. Whether additional tightening will be needed depends on economic developments. Based on the Committee's current assessment of the outlook and balance of risks, there will likely be one additional policy rate hike, most probably in December.
Ida Wolden Bache
Pål Longva
Øystein Børsum
Ingvild Almås
Jeanette Fjære-Lindkjenn
20 September 2023
Monetary Policy Report 3/2023
Read the report (web edition)- Series:
- Monetary Policy Report
- Number:
- 3/2023
