Rate decision May 2023
At its meeting on 3 May 2023, the Committee decided to raise the policy rate by 0.25 percentage point to 3.25 percent.
Policy rate raised to 3.25 percent
Norges Bank's Monetary Policy and Financial Stability Committee unanimously decided to raise the policy rate by 0.25 percentage point to 3.25 percent. Based on the Committee's current assessment of the outlook and balance of risks, the policy rate will most likely be raised further in June.
The Committee assesses that a higher policy rate is needed to dampen inflation. Inflation is high and markedly above the target of 2 percent. Growth in the Norwegian economy has slowed, but activity remains high. The labour market is tight, and wage growth is set to be higher in 2023 than last year.
The future policy rate path will depend on economic developments. Since the March Report, economic activity has been broadly in line with expectations. Underlying inflation has been as projected. Higher wage growth and the krone depreciation will contribute to keeping inflation elevated ahead.
“If the krone remains weaker than projected or pressures in the economy persist, a higher policy rate than envisaged earlier may be needed”, says Governor Ida Wolden Bache.
Rate effective from 5 May 2023:
- Policy rate: 3.25 %
- Overnight lending rate: 4.25 %
- Reserve rate: 2.25 %
Contact:
Press telephone: +47 21 49 09 30
Email: presse@norges-bank.no
The policy rate has been raised to bring down inflation
Introductory statement by Governor Ida Wolden Bache at press conference following announcement of the policy rate on 4 May 2023.
Chart 1: Policy rate raised by 0.25 percentage point
Norges Bank’s Monetary Policy and Financial Stability Committee decided to raise the policy rate by 0.25 percentage point to 3.25 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 is too high
Inflation is now markedly above the target. In March, consumer prices were 6.5 percent higher than one year earlier. High energy prices are a key driver of inflation, but other goods and services prices have also risen rapidly.
Price stability is crucial for maintaining a well-functioning economy. The policy rate is being set with the aim of bringing inflation back to the target of 2 percent. At the same time, we want to avoid a slowdown in economic growth beyond what is necessary to tackle inflation. We have not yet seen the full effects of our past rate hikes.
Our March forecasts indicated a policy rate increase to around 3.5 percent this summer. New forecasts have not been prepared for this monetary policy meeting, but we have assessed new information against the forecasts we presented in March.
Chart 3: International inflation has slowed
Inflation among trading partners is also high but has eased in many countries in recent months. Gas and power prices have come down from the very high levels seen last year.
Problems at some US and Swiss banks led to large movements in financial markets in March. Global equity indexes have risen since the March Report, and bond risk premiums have fallen. US and European households and firms appear to be finding it more difficult to obtain loans.
Chart 4: The krone has depreciated
High inflation has prompted central banks in many countries to raise policy rates quickly and more than in Norway. The Norwegian krone has depreciated in recent months and is now at its weakest level since the onset of the pandemic in spring 2020. The krone is weaker than we projected in March.
Activity in the Norwegian economy is high. Household consumption has continued to increase despite high inflation and higher interest rates. The employment rate is high and employment has risen further so far this year. The labour market is tight. Economic growth has nevertheless slowed recently. Unemployment moved a little higher in April, and the number of job postings has declined.
Chart 5: Wage growth has risen
The tight labour market has led to a pick-up in wage growth. Wage growth last year was the highest since 2011, with a further rise expected this year. The outcome of this year’s wage settlement so far suggests that annual wage growth will be slightly higher than we projected in March.
Higher wage growth means higher business costs and could lead to higher prices for domestically produced goods. The krone depreciation will generate higher costs for imported goods ahead.
Chart 6: Further rate rise likely in June
The Committee assesses that a higher policy rate is needed to dampen inflation.
Since the publication of our March projections, overall economic activity has been broadly as expected. Excluding energy prices, consumer price inflation has also moved as projected. Higher wage growth and the krone depreciation will contribute to keeping inflation elevated ahead. If the krone remains weaker than projected or pressures in the economy persist, a higher policy rate than envisaged earlier may be needed.
The future policy rate path will depend on economic developments, but we will most likely raise the policy rate again in June, at which time we will also present updated forecasts for the Norwegian economy.
Presentation at press conference 4 May 2023 (pdf)
26:45
Press conference in connection with policy rate decision May 2023 (In Norwegian)
Monetary policy assessment
Norges Bank's Monetary Policy and Financial Stability Committee decided to raise the policy rate from 3 percent to 3.25 percent at its meeting on 3 May. Based on the Committee's current assessment of the outlook and balance of risks, the policy rate will most likely be raised further in June.
In the March 2023 Monetary Policy Report, which was published on 23 March, the Committee's assessment was that the policy rate would most likely be raised further in May. The policy rate forecast indicated a policy rate increase to around 3.5 percent this summer. There were prospects that inflation would recede and approach the target somewhat further out. Unemployment was projected to edge up, albeit from a low level.
Higher policy rate expectations and a weaker krone
Consumer price inflation among Norway's main trading partners has slowed further but is still high. Underlying inflation has shown little change. Futures prices for oil, gas and power have risen somewhat since March. Economic activity among trading partners appears to have been slightly higher in the first quarter than projected in the March Report. In many countries, indicators of service sector activity have increased in recent months.
Problems at some banks in the US and Switzerland led to large movements in financial markets in March. Global equity indexes have risen since the March Report, and bond risk premiums have fallen. Credit conditions facing US and European households and firms appear to have tightened somewhat. Central banks in many of Norway's trading partner countries have raised policy rates further and are signalling that rates will likely be raised somewhat more. Both Norwegian and international market-implied policy rate expectations have risen. The Norwegian krone has depreciated and is weaker than projected.
Import-weighted exchange rate index, I-44
Sources: Refinitiv Datastream and Norges Bank
Growth in the Norwegian economy has slowed as expected
Growth in the Norwegian economy has slowed in recent months, and in February mainland GDP was approximately as projected in the March Report. Household consumption has increased and has been slightly higher than expected. In the secondary housing market, the number of unsold homes has declined, and house prices were higher than expected in March. New home sales have fallen further, and housing starts are at a low level.
The labour market remains tight. Registered unemployment increased as expected from 1.7 percent in March to 1.8 percent in April, while employment appears to be somewhat higher than projected in the March Report. The number of new job vacancies has declined.
In the wage settlement between the Norwegian Confederation of Trade Unions (LO) and the Confederation of Norwegian Enterprise (NHO) and in several of the other settlements, a wage norm of 5.2 percent was agreed for 2023. The wage norm for the local government sector ended up at 5.4 percent. Overall, this would suggest that annual wage growth will be slightly higher than projected in the March Report.
GDP for mainland Norway. Seasonally adjusted. Index. February 2020 = 100
Sources: Statistics Norway and Norges Bank
Underlying inflation as projected
Inflation is high. The 12-month rise in the consumer price index (CPI) edged up to 6.5 percent in March. This was higher than projected and reflects the higher-than-expected rise in energy prices. The 12-month rise in the CPI adjusted for tax changes and excluding energy products moved up to 6.2 percent in March as projected earlier. Other indicators of underlying inflation also increased. The rise in prices for imported goods was higher than expected, while the rise in prices for domestically produced goods and services was lower than projected.
Consumer prices. Twelve-month change. Percent
Sources: Statistics Norway and Norges Bank
Policy rate raised to 3.25 percent
The operational target of monetary policy is annual consumer price inflation of close to 2 percent 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.
The Committee assesses that a higher policy rate is needed to dampen inflation. Inflation is high and markedly above target. Growth in the Norwegian economy has slowed, but activity remains high. The labour market is tight, and wage growth is set to be higher in 2023 than last year.
The future policy rate path will depend on economic developments. Since the March Report, economic activity has been broadly in line with expectations. Underlying inflation has been as projected. Higher wage growth and the krone depreciation will contribute to keeping inflation elevated ahead. If the krone remains weaker than projected or pressures in the economy persist, a higher policy rate than envisaged earlier may be needed.
The Committee unanimously decided to raise the policy rate by 0.25 percentage point to 3.25 percent. Based on the Committee's current assessment of the outlook and balance of risks, the policy rate will most likely be raised further in June.
Ida Wolden Bache
Pål Longva
Øystein Børsum
Ingvild Almås
Jeanette Fjære-Lindkjenn
3 May 2023