“Inflation has picked up and been markedly higher than expected. If the policy rate is lowered prematurely, prices may continue to rise rapidly. Therefore, we decided to leave the policy rate unchanged now,” says Governor Ida Wolden Bache.

The policy rate was raised significantly to tackle high inflation and has stood at 4.5% since December 2023. The tightening of monetary policy has contributed to cooling down the Norwegian economy and to dampening inflation. Unemployment has edged up in recent years, albeit from a low level. The output gap has narrowed, and output is now close to potential. Inflation has fallen markedly from the peak but is still above target. High growth in business costs is likely to stoke inflation ahead.

Inflation has picked up in recent months and has been markedly higher than expected, and wage growth in 2024 turned out higher than projected. This could lead to higher inflation ahead than previously projected. Economic activity fell towards the end of last year and was lower than expected, but Norges Bank’s Regional Network contacts report increased activity over winter. At the same time, unemployment has fallen a little and been lower than expected.

The Committee judges that a restrictive monetary policy is still needed to bring inflation down to target within a reasonable time horizon. If the policy rate is lowered prematurely, prices may continue to rise rapidly. On the other hand, an overly tight monetary policy could restrict the economy more than needed to bring inflation down to target. Weighing these trade-offs, the Committee judges that the current stance is warranted for somewhat longer than previously signalled.

The policy rate forecast in this Report is consistent with a decline in the policy rate to 4% by the end of the year, followed by a gradual further decline over the next years. The forecast has been revised up somewhat from the previous Report. Growth in the Norwegian economy is expected to pick up a little in the years ahead. Registered unemployment is likely to increase slightly to around pre-pandemic levels. Inflation is projected to move down and be close to 2% towards the end of 2028.

The uncertainty surrounding the outlook is greater than normal, and the future path of the policy rate will depend on economic developments. If more extensive trade restrictions were to lead to a global economic downturn, the outlook for the Norwegian economy could also weaken. If the pickup in inflation proves more temporary than currently assumed or unemployment rises more than projected, the policy rate may be reduced faster than currently envisaged. 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.

Norges Bank will hold a press conference following the monetary policy decision in May 2025.