Rate decision June 2023
At its meeting on 22 June 2023, the Committee decided to raise the policy rate from 3.25 to 3.75 percent.
Policy rate raised to 3.75 percent
Norges Bank's Monetary Policy and Financial Stability Committee decided to raise the policy rate by 0.50 percentage point to 3.75 percent. The Committee’s current assessment of the outlook and balance of risks implies that the policy rate will most likely be raised further in August.
Inflation is markedly above the target. Wage growth is set to be higher than in 2022. Activity remains high amid continued tightness in the labour market, but pressures in the Norwegian economy are easing.
The Committee judges that a higher policy rate than previously signalled is needed to bring inflation down to target. Inflation has been markedly higher than projected in the March Report. International interest rates have risen more than anticipated. Higher wage growth and a weaker krone than projected earlier will push up inflation ahead.
“If we do not raise the policy rate, prices and wages could continue to rise rapidly and inflation become entrenched. It may then become more costly to bring inflation down again”, says Governor Ida Wolden Bache.
The interest rate path ahead will depend on economic developments. If the krone turns out to be weaker than assumed or pressures in the economy persist, a higher-than-projected policy rate may be needed to bring inflation down towards the target. At the same time, the effects of the past rate hikes are not yet fully evident. Looking ahead, the tightening effect of high inflation and higher interest rates on household consumption is uncertain. If inflation declines more rapidly or there is a more pronounced slowdown in the Norwegian economy, the policy rate may be lower than currently envisaged.
The policy rate forecast has been revised up since the March Report and indicates a rise in the policy rate to 4.25 percent in the course of autumn.
The August policy rate decision will be presented at an event during “Arendalsuka” on 17 August.
Rate effective from 23 June 2023:
- Policy rate: 3.75 %
- Overnight lending rate: 4.75 %
- Reserve rate: 2.75 %
Contact:
Press telephone: +47 21 49 09 30
Email: presse@norges-bank.no
26:50
Press conference in connection with policy rate decision June 2023 (In Norwegian)
Need for higher policy rate to bring down inflation
Chart 1: Policy rate raised by 0.5 percentage point
Norges Bank's Monetary Policy and Financial Stability Committee decided to raise the policy rate by 0.5 percentage point to 3.75 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.
Chart 2: Inflation markedly above the target
Consumer price inflation is now 6.7 percent, and markedly above the target. The high level of inflation is reducing purchasing power, and low-income groups and those with the smallest margins are being hit hardest.
Prices for both imported goods and domestically produced goods have risen at a fast pace. Inflation is markedly higher than the previous projections we provided in March. At the same time, there are prospects that wage growth will be higher and the krone weaker than we expected at that time, which will push up inflation ahead. Given these developments, the Committee judges that a higher policy rate is needed than projected in March.
Chart 3: Larger rise in interest rates abroad than in Norway
Norges Bank was among the first central banks to raise interest rates in autumn 2021 following the pandemic. But as inflation took off internationally, policy rates were raised sharply in many countries. Over the past year, foreign interest rates have risen more than domestic interest rates and interest rates are now higher in some trading partner countries than in Norway. This is likely a main reason behind the krone depreciation. Since March, interest rates have risen further internationally.
Chart 4: Weaker-than-projected krone exchange rate
The krone exchange rate has been weaker than we projected in March, but the krone has regained some strength recently, likely because markets participants have revised up their expectations for policy rate in Norway.
We have a floating krone exchange rate, and Norges Bank does not have a goal of stabilising the exchange rate at a specific level. Developments in the krone exchange are nonetheless of importance for the economy, and hence for monetary policy. A weaker krone increases the prices for imported goods in krone terms.
Chart 5: Inflation past the peak in many countries
Inflation has passed the peak in many of our trading partner countries. Prices for a range of commodities, such as metals and food, have fallen. Weaker external inflationary impulses will dampen imported goods inflation. At the same time, given a weaker-than-projected krone, imported inflation will likely prove higher ahead than we foresaw in March.
Chart 6: Economic activity remains high
Activity in the Norwegian economy is still strong, and the employment rate is high. The pace of economic growth has recently slowed. Following a marked rise towards the end of 2022, household consumption has fallen so far this year. Unemployment has edged up.
Norges Bank’s Regional Network enterprises expect cautious growth in activity through summer, but there are wide differences across industries. Growth in oil services is strong thanks to vigorous investment in the petroleum industry. Some firms report that the krone depreciation has strengthened their competitiveness and boosted tourism. Others indicate that a weaker krone is weighing on activity owing to higher costs. Retail trade and the construction industry expect a fall in activity ahead
Wage growth is set to be higher than projected in March. Annual wage growth is projected at 5.5 percent this year which is still lower than our inflation projection for 2023 which has been revised up to 6 percent.
The Committee judges that a higher policy rate is needed to bring down inflation. The Committee is seeking to balance the risk of tightening too much against the risk of tightening too little. We have still not seen the full of effects of the past rate hikes, and there is a risk that further rate increases will lead to a sharper slowdown in the Norwegian economy than needed to tackle inflation, which is to be avoided. But insufficient monetary tightening raises the risk of a continued rapid rise in prices and wages. If the high level of inflation becomes entrenched, it may prove more costly to bring it down again.
The Committee judges that these risks are best balanced by raising the policy rate to 3.75 percent now.
Chart 7: Policy rate will most likely be raised further in August
The policy rate will most likely be raised further in August, and the current path indicates a rise to 4.25 percent in the course of autumn. Mortgage rates may then move up towards 5½ percent further ahead.
Borrowers are facing higher interest expenses on top of higher prices for many goods and services. For a period ahead, many people will have to cope with tighter budgets and a portion might have to reduce spending. This will be hard on some people. But by raising the policy rate, we are helping to reduce inflation.
Chart 8: Prospects for lower inflation and somewhat higher unemployment
Given the current policy rate path, inflation is projected to recede and move towards the target of 2 percent over the medium term. Unemployment will likely edge up to a slightly higher level than during the last few years before the pandemic.
The outlook is highly uncertain. If the economy evolves differently from that envisaged, the policy rate path may also change. But there is no uncertainty about the objective. 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.
Monetary policy assessment
Norges Bank's Monetary Policy and Financial Stability Committee decided to raise the policy rate from 3.25% to 3.75% at its meeting on 21 June. The Committee’s current assessment of the outlook and balance of risks implies that the policy rate will most likely be raised further in August.
Further rise in interest rates internationally
Consumer price inflation among Norway's main trading partners has slowed further but is still high. Underlying inflation has remained elevated and been higher than expected. Global freight rates have returned to pre-pandemic levels, and prices for a range of commodities, such as metals and food, have fallen. This could curb the rise in imported goods inflation in Norway. Gas and electricity prices have fallen somewhat since March, while oil prices have edged up.
Policy rates and estimated forward rates. Percent
Sources: Bloomberg, Refinitiv Datastream and Norges Bank
Central banks in many trading partners countries have raised their policy rates further with the aim of curbing inflation. High inflation and reduced banking sector stress have raised policy rate expectations abroad since March. Policy rates are expected to peak towards the end of the year. Long-term interest rates and international equity indexes have also advanced, while bond risk premiums have fallen since March. At the same time, it appears that banks in the US and Europe have further tightened household and corporate credit standards.
Economic activity among trading partners has been higher than expected, and the labour markets remains tight. Economic growth is expected to be subdued in 2023, partly reflecting tighter financial conditions and weak developments in household purchasing power. There are prospects that economic activity will remain slightly higher than projected in the March 2023 Monetary Policy Report.
The krone has been weaker than expected
The krone has depreciated appreciably over the past year, partly reflecting a larger rise in foreign interest rates than in Norwegian rates and a low interest rate differential. The krone has been weaker than projected in the March Report but has appreciated again in recent weeks, coincident with a rise in Norwegian market rates. Market-implied rates indicate expectations of a further policy rate rise ahead. Corporate lending rates have increased a little more since March, and residential mortgage rates have moved up broadly in line with expectations.
Import-weighted exchange rate index. I-44
Sources: Refinitiv Datastream and Norges Bank
Gradually easing pressures in the Norwegian economy
Growth in the Norwegian economy has slowed. Mainland GDP has been a little lower than projected in the March Report. After rising sharply towards the end of last year, household consumption has declined so far in 2023.
GDP for mainland Norway. Seasonally adjusted. Index. February 2020 = 100
Sources: Statistics Norway and Norges Bank
Employment has risen further and been slightly higher than expected. The labour market remains tight, but several indicators now suggest some easing of economic pressures. As expected, registered unemployment has edged up and was 1.8% in May. The share of enterprises in Norges Bank's Regional Network reporting that labour shortages are a constraint on production fell further in Q2.
Capacity utilisation and labour shortages according to the Regional Network. Percentage shares
Source: Norges Bank
Regional Network enterprises report a slightly improved outlook compared with last winter and now expect activity to pick up through summer, but there are wide differences across industries. Growth in oil services is strong thanks to vigorous investment in the petroleum industry. Many enterprises report that the krone depreciation is improving cost competitiveness and boosting tourism. At the same time, retail trade contacts expect a fall in activity ahead and indicate that a weaker krone is pushing up costs and that higher selling prices will dampen demand. The construction industry expects a further fall in activity owing to continued weak new home sales. In the market for existing homes, turnover has remained buoyant and house prices have been higher than expected. House prices are expected to show little change in the near term.
The Norwegian economy is projected to grow cautiously ahead, with activity supported by high petroleum investment and increased exports. Higher public expenditure and increased transfers to households will also lift activity. At the same time, household real disposable income is projected to be lower than in 2022, leading to a fall in consumption this year. The saving ratio has moved down from the high levels observed during the pandemic, and households are expected to continue drawing down on existing savings this year. Further ahead, major investments related to climate transition are set to lift activity.
Inflation has been markedly higher than expected
In Norway, inflation is high. Prices have increased for a range of goods and services. The 12-month rise in the consumer price index (CPI) has edged up and was 6.7% in May, which was higher than projected in the March Report. Energy and food prices in particular have been higher than expected. Various indicators of underlying inflation have risen since the March Report. The 12-month rise in the CPI adjusted for tax changes and excluding energy products was 6.7%, which was also higher than projected. Prices for both imported goods and domestically produced goods and services have risen more than expected.
Wage growth is set to be higher than projected in March. Annual wage growth in 2023 is now projected at 5.5%, which is slightly higher than the wage expectations of the social partners and Regional Network enterprises.
Weaker international inflationary impulses will help curb the rise in prices for imported goods, but imported inflation is nevertheless expected to be higher ahead than envisaged in March owing to a weaker-than-projected krone. That, combined with higher wage growth, suggests that underlying inflation is likely to remain elevated longer than envisaged earlier.
Inflation expectations have increased over the past year according to Norges Bank's expectations survey. Long-term inflation expectations fell slightly over spring but are still higher than 2%.
CPI and CPI-ATE. Twelve-month change. Percent
Source: Statistics Norway
Policy rate raised to 3.75%
The objective 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 markedly above the target. Wage growth is set to be higher than in 2022. Activity remains high amid continued tightness in the labour market, but pressures in the Norwegian economy are easing.
The Committee judges that a higher policy rate than previously signalled is needed to bring inflation down to target. Inflation has been markedly higher than projected in the March Report. International interest rates have risen more than anticipated. Higher wage growth and a weaker krone than projected earlier will push up inflation ahead. The Committee gave weight to the risk that prices and wages could continue to rise rapidly and inflation become entrenched if monetary policy is not tightened. It may then become more costly to bring inflation down again.
The policy rate forecast has been revised up since the March Report and indicates a rise in the policy rate to 4.25% in the course of autumn. Higher interest rates and elevated inflation are expected to curb demand in the Norwegian economy. Economic growth is projected to be subdued this year, before picking up gradually again towards the end of next year. Unemployment is likely to edge up ahead. Inflation is projected to moderate and approach the target somewhat further ahead.
Sources: Statistics Norway and Norges Bank
The interest rate path ahead will depend on economic developments. If the krone turns out to be weaker than assumed or pressures in the economy persist, a higher-than-projected policy rate may be needed to bring inflation down towards the target. At the same time, the effects of the past rate hikes are not yet fully evident. Looking ahead, the tightening effect of high inflation and higher interest rates on household consumption is uncertain. If inflation declines more rapidly or there is a more pronounced slowdown in the Norwegian economy, the policy rate may be lower than currently envisaged.
The Committee decided unanimously to raise the policy rate by 0.50 percentage point to 3.75% at its meeting on 21 June. The Committee’s current assessment of the outlook and balance of risks implies that the policy rate will most likely be raised further in August.
Ida Wolden Bache
Pål Longva
Øystein Børsum
Ingvild Almås
Jeanette Fjære-Lindkjenn
21 June 2023
Monetary policy report 2/2023
Read the report (web edition)- Series:
- Monetary Policy Report
- Number:
- 2/2023
The file "Projections for main economic aggregates" was corrected at 10.06 am on 22 June.
