Rate decision December 2024
At its meeting on 18 December 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 December. Based on the Committee’s current assessment of the outlook, the policy rate will most likely be reduced in March 2025.
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 fallen markedly from the peak, but the rapid rise in business costs is expected to restrain further disinflation.
“The Committee judges that a restrictive monetary policy is still needed to stabilise inflation around target, but that the time to begin easing monetary policy is soon approaching,” says Governor Ida Wolden Bache.
In its discussion, the Committee noted that activity in the Norwegian economy appears to be holding up better than previously projected. On the other hand, inflation has moved closer to target, and inflation pressures appear to have been slightly more subdued than previously assumed. The Committee does not want to restrict economic activity more than needed to bring inflation down to target within a reasonable time horizon.
The forecast in this Report implies a gradual reduction in the policy rate from 2025 Q1. The forecast is little changed relative to the September forecast but indicates a somewhat smaller rate reduction in the coming years. Unemployment will likely increase a little, albeit slightly less than projected in September. Inflation is projected to be slightly above 2 percent at the end of 2027.
There is substantial uncertainty about the outlook for both the global and Norwegian economy. The Committee was concerned with the risk of an increase in international trade barriers. Higher tariffs will likely dampen global growth, but the implications for price prospects in Norway are uncertain. The Committee also noted that inflation has slowed faster than projected over the past year. If prospects suggest that inflation will be lower or unemployment higher than currently projected, the policy rate may be lowered faster than currently envisaged. On the other hand, wage and price inflation could remain elevated for longer than projected, for example should the krone weaken or capacity utilisation increase. A higher policy rate than currently envisaged may then be required.
Norges Bank will hold a press conference following the monetary policy decision in January 2025.
Rate effective from 20 December 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
Soon appropriate to begin easing monetary policy
Introductory statement by Governor Ida Wolden Bache at the press conference following the announcement of the policy rate on 19 December 2024.
Chart 1: Policy rate kept unchanged at 4.5 percent
The Monetary Policy and Financial Stability Committee has decided to keep the policy rate unchanged at 4.5 percent.
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.
In recent years, we have raised the policy rate significantly to tackle high inflation. 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. Inflation has fallen markedly and moved closer to target but is not expected to fall as fast ahead. If the policy rate is lowered too quickly, inflation could remain above target for too long. At the same time, the Committee does not want to restrict the economy more than needed to bring inflation down to target within a reasonable time horizon.
Since the previous forecasts presented in September, economic activity has been a little higher than expected, while inflation pressures appear to have been slightly lower.
The Committee judges that a restrictive monetary policy is still needed, but that the time to begin easing monetary policy is soon approaching. If developments turn out as we now envisage, the Committee will reduce the policy rate in March next year.
Chart 2: Policy rate will likely be reduced in March
The Committee projects a gradual reduction in the policy rate in the years ahead. The policy rate forecast presented today is consistent with a reduction in the policy rate to 4.25 percent in March, with a further decline to 3.75 percent by the end of 2025.
Even though the time is soon approaching to begin easing monetary policy, we must be prepared for a higher interest rate level than we had been accustomed to over the past decade. Given the current policy rate path, the average interest rate on housing loans is projected to decline from 5.6 percent today to just below 4.5 percent in 2027.
I want to emphasise that a forecast is not a promise. There is a large degree of uncertainty around the economic outlook. We are likely to see a period of increased trade barriers ahead as the incoming US administration has announced higher tariffs on imports from China among other countries. Increased tariffs will likely dampen global growth, but their impact will depend on the scale of potential increases in import tariffs and countervailing measures. The implications for price prospects, and hence for interest rate prospects, in Norway are uncertain. Domestic conditions may also lead to a different path for the Norwegian economy than we now foresee. If the outlook changes, the policy rate path may also be adjusted.
Let me say a few words about the background for the policy rate decision and the Committee’s assessment.
Chart 3 Growth in the Norwegian economy has picked up slightly
Growth in the Norwegian economy was weak through last year but has picked up slightly this year. Activity is primarily being lifted by high public demand and large investments in the petroleum industry. At the same time, construction activity has shown a sharp decline. Unemployment has risen somewhat since its lowest level a couple of years ago, but in recent months unemployment has changed little.
Growth in the Norwegian economy is projected to be a little higher in the coming years than in 2024, partly owing to faster growth in private consumption. Housing construction is expected to start picking up through spring next year, but it will likely take a long time for construction activity to return to more normal levels.
Chart 4: Inflation has fallen markedly from its peak
Inflation among trading partners has moved down towards their inflation targets, and many central banks have cut their policy rates. Financial markets expect further rate cuts internationally ahead.
Inflation in Norway has also fallen markedly from its peak and faster than projected. The main factor that has pulled down inflation is the fall in prices for imported goods. The strong krone depreciation up to summer last year has restrained the decline in inflation. Inflation is still not right on the target. Over the past year, consumer prices have risen by 2.4 percent. Excluding energy prices, which fluctuate widely, inflation stands at around 3 percent.
Wage growth has accelerated in recent years. Wages rose by 5.2 percent last year and are expected to increase at the same rate this year. Wage growth is projected to slow ahead, but will still be high relative to productivity growth, which means continued high growth in business costs. This will restrain further disinflation ahead.
Chart 5. Inflation back to target without a large rise in unemployment
Given the current projections, there are prospects that wages will rise faster than prices, and most people will see their budgets stretch further. Consumer price inflation is projected to slow in the coming years and run slightly above 2 percent at the end of 2027. Unemployment is projected to increase a little, albeit slightly less than we envisaged in September.
23:58
Press conference in connection with the policy rate decision 19 December 2024
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 December. Based on the Committee’s current assessment of the outlook, the policy rate will most likely be reduced in March 2025.
International inflation has slowed markedly since the peak
Consumer price inflation among Norway’s main trading partners has declined markedly since the peak in 2022 and has moved closer to inflation targets. Core inflation has also fallen markedly but is somewhat higher than overall consumer price inflation. Economic growth in the US has been high in both 2023 and 2024. Growth is expected to soften next year, but a more expansionary fiscal policy will contribute to sustaining growth. Euro area economic growth has picked up somewhat this year after close to zero growth through 2023. Trade policy uncertainty ahead is likely to dampen growth, but growth is nevertheless expected to firm a bit going forward. Economic growth for trading partners as a whole is expected to pick up somewhat over the next year.
Consumer prices. Twelve-month change. Percent
Sources: LSEG Datastream and Statistics Norway
Central banks among Norway’s main trading partner countries started reducing their respective policy rates earlier this year in response to lower inflation. For trading partners as a whole, policy rate expectations are a little higher than in September. The market expects fewer rate cuts by the US Federal Reserve ahead, while the European Central Bank (ECB) is expected to lower its policy rate a bit faster.
Norwegian policy rate expectations have increased since September, and market pricing indicates that the policy rate will be reduced in the course of the first quarter of 2025. As expected, the krone is at broadly the same level as in September. The Norwegian money market spread has fallen and is projected to remain lower ahead than previously assumed. Oil prices are little changed since September, while gas prices have risen.
Import-weighted exchange rate index. I-44
Source: Norges Bank
Stronger growth in the Norwegian economy
Growth in the Norwegian mainland economy was low in 2023 but has accelerated slightly through 2024, with third-quarter growth exceeding projections. Strong growth in public demand has contributed to underpinning economic activity, while a sharp fall in housing investment has dampened activity. Household consumption increased in Q3. New home sales have risen a little further in recent months but are still very low, and it will likely take time before housing investment starts to rise again. In the secondary market, house prices have increased further since September.
GDP for mainland Norway. Three-month moving average. Percent
Sources: Statistics Norway and Norges Bank
Norges Bank’s Regional Network enterprises expect overall growth to pick up a little through winter. Wide differences remain across industries, with strong growth in oil services activity and weakening activity in the construction industry.
Overall output in the Norwegian economy appears to have been around potential since the beginning of 2024. Registered unemployment has shown little change since September and was 2.1% in November, in line with the September projections. According to LFS data, unemployment has remained stable at around 4% since March 2024. Employment increased a little in Q3, as projected in September. Job vacancies remain elevated, and Regional Network contacts expect moderate employment growth over the next months.
Growth in the Norwegian economy is projected to be somewhat lower over the next half-year than in Q3. Solid growth in purchasing power is expected to lift consumption, and combined with high public demand, to contribute to increased economic activity. Low housing investment will likely continue to have a dampening impact on activity in 2025. Activity in the mainland economy is expected to be higher in 2025 than projected in September, supported by among other things a more expansionary fiscal policy, an increase in household spending and higher petroleum investment than previously assumed.
Inflation has continued to fall
Inflation has continued to slow since the September Report. The 12-month rise in the consumer price index (CPI) slowed to 2.4% in November, while CPI inflation adjusted for tax changes and excluding energy products (CPI-ATE) increased to 3.0% in November, in line with that projected. The average of other underlying inflation indicators has also increased to about 3%.
Wage growth has increased in recent years, reflecting high price inflation, a tight labour market and strong profitability in some business sectors. Wage growth is projected to reach 5.2% in 2024. Wage growth is projected to slow to 4.2% in 2025, which is slightly below the September projection. The projection is a little higher than the wage expectations of the social partners, as measured in Norges Bank’s Expectations Survey and somewhat lower than Regional Network wage expectations.
High labour cost growth will likely continue to contribute to keeping domestic goods and services inflation elevated in 2025. Imported goods inflation has slowed markedly this year and is expected to remain low into next year. Overall underlying inflation is projected to show little change in the coming quarters.
Norges Bank’s Expectations Survey indicates little change in long-term inflation expectations in Q4, remaining somewhat above the 2% inflation target.
CPI and CPI-ATE. Twelve-month change. Percent
Source: Statistics Norway
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 fallen markedly from the peak, but the rapid rise in business costs is expected to restrain further disinflation.
The Committee judges that a restrictive monetary policy is still needed to stabilise inflation around target, but that the time to begin easing monetary policy is soon approaching. In its discussion, the Committee noted that activity in the Norwegian economy appears to be holding up better than previously projected. On the other hand, inflation has moved closer to target, and inflation pressures appear to have been slightly more subdued than previously assumed. The Committee does not want to restrict economic activity more than needed to bring inflation down to target within a reasonable time horizon.
The forecast in this Report implies a gradual reduction in the policy rate from 2025 Q1. The forecast is little changed relative to the September forecast but indicates a somewhat smaller rate reduction in the coming years. Unemployment will likely increase a little, albeit slightly less than projected in September. Inflation is projected to be slightly above 2% at the end of 2027.
Sources: Statistics Norway and Norges Bank
There is substantial uncertainty about the outlook for both the global and Norwegian economy. The Committee was concerned with the risk of an increase in international trade barriers. Higher tariffs will likely dampen global growth, but the implications for price prospects in Norway are uncertain. The Committee also noted that inflation has slowed faster than projected over the past year. If prospects suggest that inflation will be lower or unemployment higher than currently projected, the policy rate may be lowered faster than currently envisaged. On the other hand, wage and price inflation could remain elevated for longer than projected, for example should the krone weaken or capacity utilisation increase. 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 reduced in March 2025.
Ida Wolden Bache
Pål Longva
Øystein Børsum
Ingvild Almås
Steinar Holden
18 December 2024
Monetary policy report 4/2024
- Series:
- Monetary Policy Report
- Number:
- 4/2024