Rate decision September 2024
At its meeting on 18 September 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 18 September.
“The policy rate will likely be kept at 4.5 percent to the end of the year,” says Governor Ida Wolden Bache.
In recent years, the policy rate has been raised significantly to tackle high inflation. Since December 2023, the policy rate has been held at 4.5 percent. The interest rate has contributed to cooling down the Norwegian economy and to dampening inflation. Unemployment has edged up from a low level. Inflation has declined markedly from its peak, but underlying inflation has not declined to the same extent. Moreover, the rapid rise in business costs and the krone depreciation are expected to restrain further disinflation.
Since the June Report, inflation has been lower than expected. International policy rates appear to be coming down faster. On the other hand, the krone has depreciated. Developments in the Norwegian labour market have been broadly in line with the projections in the June Report.
The Committee judges that a restrictive monetary policy is still needed to bring inflation down to target within a reasonable time horizon. The Committee is concerned with the possibility that if the policy rate is lowered prematurely, inflation could remain above target for too long. On the other hand, an overly tight monetary policy could contract the economy more than needed.
“We believe that there is a need to keep the policy rate at today’s level for a period ahead but that the time to ease monetary policy is approaching,” says Governor Ida Wolden Bache.
The policy rate forecast in this Report implies that the policy rate will remain at 4.5 percent to the end of 2024 before being gradually reduced from 2025 Q1. The forecast is little changed from the June Report but indicates a slightly faster decline in the policy rate through 2025. Economic growth is set to pick up slightly in the years ahead. Unemployment will likely edge up. Inflation is projected to approach 2 percent towards the end of 2027.
There is uncertainty about future developments in the Norwegian economy. In its discussion, the Committee noted in particular that inflation has fallen markedly and been lower than projected for a time. Underlying inflationary pressures may be weaker than currently assumed. If prospects suggest that inflation will return to target faster or there is a more pronounced slowdown in the Norwegian economy, the policy rate may be lowered faster than currently envisaged. On the other hand, the krone has depreciated again. If the krone depreciates further or capacity utilisation increases, wage and price inflation could remain elevated for longer. A higher policy rate than currently envisaged may then be required.
Norges Bank will hold a press conference following the monetary policy decision in November.
Rate effective from 20 September 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
Time to ease monetary policy is approaching
Introductory statement by Governor Ida Wolden Bache at the press conference following the announcement of the policy rate on 19 September 2024.
Chart 1: Policy rate held unchanged
The Monetary Policy and Financial Stability Committee decided to keep the policy rate unchanged at 4.5%. Based on the Committee’s current assessment of the outlook, the policy rate will most likely be kept at that level to the end of the year.
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.
After inflation surged a couple of years ago, we have raised the policy rate significantly, and since December last year the policy rate has been held at 4.5 percent. The interest rate has contributed to cooling down the economy and to dampening inflation.
Many central banks in trading partner countries have started cutting policy rates. One might wonder why we are not reducing the policy rate now.
Inflation has declined significantly from its peak but is still above our inflation target. The rapid decline in inflation observed in recent months is not expected to continue going forward. Further disinflation will be restrained by the krone depreciation combined with the high growth in business costs.
A restrictive monetary policy is still needed to bring inflation down to target within a reasonable time horizon. The Committee is concerned with the possibility that if the policy rate is lowered prematurely, inflation could remain above target for too long. On the other hand, an overly tight monetary policy could contract the economy more than needed. When we set the policy rate, we have to balance these trade-offs.
Chart 2: Gradual policy rate reduction from next year
Based on our current assessment of the outlook, the policy rate needs to be kept at today’s level for a period ahead. At the same time, we are approaching the time to lower interest rates. If the economy evolves as envisaged, we will maintain the policy rate at 4.5 percent to the end of the year, before it is gradually reduced from the first quarter of next year. The policy rate forecast is little changed but implies a slightly faster rate reduction through next year than our previous forecast published in June.
Let me say a few more words about the background for the rate decision and the Committee’s assessment.
Chart 3: Low growth in the Norwegian economy
Growth in the Norwegian economy was low through last year and has remained weak this year. High inflation and the rise in interest rates have reduced household purchasing power and consumption, and residential construction has shown a sharp decline. Economic activity is being supported by public sector demand and heavy investment in the petroleum industry.
Information from our regional network indicates that economic growth will pick up a little in the second half of this year. But there are wide differences across industries, with oil services expecting strong growth and the construction industry a continued decline.
Over the past couple of years, the labour market has become less tight, and firms are finding it easier to fill their recruitment needs. Employment is high, but the share of the population employed has fallen a little. Unemployment has edged up from a low level.
Chart 4: Inflation has declined markedly from its peak
At its highest, inflation was above 7 percent. According to last week’s data, inflation is now running at 2.6 percent. Excluding energy prices, which are quite volatile, inflation is a little higher than 3 percent. Inflation has been lower than we expected in June.
International inflation has also fallen notably, and central bank rate cuts are now expected to be deeper and faster than before summer.
Chart 5: Wage growth is high
While wage growth is subsiding among many trading partner countries, it is still high in Norway. Wages increased by 5.2 percent last year, and a comparable increase is expected this year. We expect wage growth to moderate in the years ahead, but given weak productivity growth, business costs will continue to grow at a fast pace.
Chart 6: The krone has depreciated
The krone exchange rate has depreciated in recent years and is now weaker than at the time of the June monetary policy meeting. A weaker krone means an increase in prices for imported goods and services, and higher costs for firms that depend on imported intermediate goods. For the export industry, a weaker krone means increased profitability, which can lead to higher wage growth and, in turn, to higher inflation.
Movements in the krone exchange rate are determined by a wide range of conditions, in both Norway and internationally. This makes it difficult to explain all exchange rate movements, but we can safely say that the interest rate matters for the krone exchange rate. If we had not tightened monetary policy in recent years, the krone would have been weaker. Experience has also shown that the krone weakens when oil prices fall or, as we saw this summer, financial markets experience turbulence.
Chart 7: Inflation will slow and unemployment edge up
With the current policy rate path, inflation is projected to move down further and approach 2 percent towards the end of 2027. Unemployment will likely edge up to about the level prevailing before the pandemic.
Many people have experienced tighter household budgets in recent years, but most people will find that their budgets will stretch further going forward. Interest expenses will still be high, but we expect wages to rise faster than prices, and the debt burden will be easier to bear.
The economy may evolve differently than we now anticipate. If the outlook suggests that inflation will return to target faster or there is a more pronounced slowdown in the Norwegian economy, the policy rate may be lowered faster than currently envisaged. On the other hand, if the krone depreciates further or economic pressures increase, inflation could remain elevated for longer. A higher policy rate than currently envisaged may then be required.
Inflation has slowed sharply. That’s welcome news, and now it’s important that we go the last mile of returning inflation back to the target. By maintaining confidence in the inflation target, we are better equipped to deal with new shocks and periods of turbulence in the future.
Monetary policy assessment
Norges Bank’s Monetary Policy and Financial Stability Committee decided to keep the policy rate unchanged at 4.5% at its meeting on 18 September. Based on the Committee’s current assessment of the outlook, the policy rate will most likely be kept at that level to the end of 2024.
Lower international inflation and expectations of policy rate cuts
Consumer price inflation among Norway’s main trading partners has declined markedly over the past couple of years and is approaching the inflation targets of a number of central banks. Core inflation has also fallen markedly but is somewhat higher than headline inflation. Economic activity among trading partners increased in Q2 broadly in line with projections. In many countries, labour market tightness has eased recently. Oil prices have fallen since June.
Many central banks have expressed increased confidence that inflation will be close to their inflation targets ahead, and that the current tight monetary policy stance is no longer warranted. Central banks in a number of main trading partner countries have reduced their policy rates, and market expectations indicate further cuts both this year and next. Policy rate expectations have fallen considerably since the June 2024 Monetary Policy Report, and by somewhat more abroad than in Norway. Market pricing indicates a reduction in the Norwegian policy rate towards the end of this year. Long-term interest rates are also lower than at the time of the June Report. The krone has depreciated and is weaker than projected in June.
Weak growth in the Norwegian economy
Growth in the Norwegian economy was low through last year and has remained sluggish so far this year. In 2024 Q2, growth was slightly lower than expected. Household consumption increased in Q2, but in July slumping car sales contributed to a fall in goods consumption. Housing investment continued to fall in Q2 from an already low level. New home sales have picked up a little so far this year, but it will likely take time before housing investment starts to rise again. In the secondary market, house prices have increased since the June Report, but are slightly lower than projected.
Norges Bank’s Regional Network enterprises expect some increase in overall activity in the second half of 2024 and slightly higher growth than in the first half-year. There are still wide differences across industries. Services contacts report solid demand and expect activity to increase further in the near term. Oil services expect continued strong growth. Manufacturing contacts expect weak growth in activity, while construction industry and retail trade contacts expect a decline.
Overall output in the Norwegian economy appears to have been around potential since the beginning of the year. Registered unemployment has shown little change in recent months and was 2.0% in August, as projected in the June Report. LFS unemployment data indicate that unemployment has been stable around 4% since March 2024. Employment was little changed in Q2, broadly as expected.
Growth in the Norwegian economy is set to be slightly lower in the near term than projected in the June Report. Growth is projected to pick up a little in the second half of 2024 but to remain low. In the short term, a decline in housing and business investment will likely weigh down on activity, while an increase in consumption will lift activity. Petroleum investment will likely boost activity both this year and next, with investment now expected to be higher than previously assumed. Public demand will also support activity ahead. In the projection, capacity utilisation is expected to drift further down over the next year with output running at somewhat below potential.
Declining inflation
Inflation has fallen further since the June Report and has been lower than expected. In recent months, inflation has been pushed down by a fall in energy prices. In August, the 12-month rise in consumer price index (CPI) moved down to 2.6%, while CPI inflation adjusted for tax changes and excluding energy products (CPI-ATE) slowed to 3.2%. The average of other underlying inflation indicators has also decreased. Reduced child daycare prices dampened inflation in August and will continue to restrain the 12-month rise in consumer prices over the next year. In the near term, low energy prices will dampen inflation.
High wage growth and weak productivity growth will contribute to keeping growth in business costs at a high level ahead. Wage growth is projected at 5.2% in 2024, as in the June Report. Wage growth is expected to moderate next year, as indicated by Norges Bank’s Regional Network and Expectations Survey. The social partners have lowered their wage expectations for 2025 since June.
According to the Expectations Survey, long-term inflation expectations fell slightly in Q3 but are still somewhat higher than the 2% inflation target.
Policy rate unchanged at 4.5%
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.
In recent years, the policy rate has been raised significantly to tackle high inflation. Since December 2023, the policy rate has been held at 4.5%. The interest rate has contributed to cooling down the Norwegian economy and to dampening inflation. Unemployment has edged up from a low level. Inflation has declined markedly from its peak, but underlying inflation has not declined to the same extent. Moreover, the rapid rise in business costs and the krone depreciation are expected to restrain further disinflation.
Since the June Report, inflation has been lower than expected. International policy rates appear to be coming down faster. On the other hand, the krone has depreciated. Developments in the Norwegian labour market have been broadly in line with the projections in the June Report.
The Committee judges that a restrictive monetary policy is still needed to bring inflation down to target within a reasonable time horizon. The Committee is concerned with the possibility that if the policy rate is lowered prematurely, inflation could remain above target for too long. On the other hand, an overly tight monetary policy could contract the economy more than needed. In assessing the trade-offs between these considerations, the Committee concluded that it is appropriate to keep the policy rate at today’s level for a period ahead but that the time to ease monetary policy is approaching.
The policy rate forecast in this Report implies that the policy rate will remain at 4.5% to the end of 2024 before being gradually reduced from 2025 Q1. The forecast is little changed from the June Report but indicates a slightly faster decline in the policy rate through 2025. Economic growth is set to pick up slightly in the years ahead. Unemployment will likely edge up. Inflation is projected to approach 2% towards the end of 2027.
There is uncertainty about future developments in the Norwegian economy. In its discussion, the Committee noted in particular that inflation has fallen markedly and been lower than projected for a time. Underlying inflationary pressures may be weaker than currently assumed. If prospects suggest that inflation will return to target faster or there is a more pronounced slowdown in the Norwegian economy, the policy rate may be lowered faster than currently envisaged. On the other hand, the krone has depreciated again. If the krone depreciates further or capacity utilisation increases, wage and price inflation could remain elevated for longer. A higher policy rate than currently envisaged may then be required.
The Committee unanimously decided to keep the policy rate unchanged at 4.5%. Based on the Committee’s current assessment of the outlook, the policy rate will most likely be kept at that level to the end of 2024.
Ida Wolden Bache
Pål Longva
Øystein Børsum
Ingvild Almås
Steinar Holden
18 September 2024
Monetary policy report 3/2024
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