Norwegian central bank holds rates steady, won't ease policy until next year

(Sharecast News) - Norway's central bank kept interest rates unchanged on Thursday and warned that inflation will likely remain elevated for some time, with monetary policy likely to remain stable until at least the end of the year. Norges Bank's Monetary Policy and Financial Stability Committee kept its main policy rate at 4.5% - a level which it has maintained since January.

The central bank embarked on monetary tightening during the current economic cycle in September 2021, which has contributed to cooling down the Norwegian economy and lowering inflation.

However, while inflation has come in lower than projected in recent months - the annual rate of consumer price inflation fell sharply in May to 2.7% from 3.4% in April - it is still running above the 2% target, and the recent rapid rise in business costs will likely continue to prop up price in the near term.

"The Committee was concerned with the possibility that if the policy rate is lowered prematurely, inflation could remain above target for too long," Norges Bank said in a statement. "The Committee judges that the policy rate is sufficiently high to bring inflation down to target within a reasonable time horizon, but that there will be a need to maintain a tight monetary policy stance for somewhat longer than previously projected."

Norges Bank governor Ida Wolden Bache said that the policy rate would likely stay at 4.5% "to the end of the year, before gradually being reduced".

The central bank predicts that while GDP growth will "pick up a little" in the coming years, inflation won't approach the 2% target until the end of 2027, based on current economic projections.

"There is uncertainty about future developments in the Norwegian economy. If capacity utilisation increases or the krone depreciates, wage and price inflation could remain elevated for longer. In that case, there may be a need to raise the policy rate. If unemployment rises more than expected, or price inflation declines more rapidly, the policy rate may be lowered earlier than currently envisaged."