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Rate decision June 2024

At its meeting on 19 June 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 19 June. Based on the Committee's current assessment of the outlook and balance of risks, the policy rate will likely be kept at that level for some time ahead.

The policy rate has been raised significantly in recent years and has contributed to cooling down the Norwegian economy. Growth in the economy has slowed, and price inflation has declined. At the same time, the employment-to-population ratio is high. Inflation is still running above target, and the rapid rise in business costs will contribute to keeping inflation elevated ahead. The Committee was concerned with the possibility that if the policy rate is lowered prematurely, inflation could remain above target for too long.

Since the March Report, inflation has been a little lower than projected, while unemployment has increased as expected. On the other hand, Regional Network enterprises report improved prospects, and it appears that wage growth will be higher than envisaged earlier. This could mean that inflation will be higher ahead than projected in the March Report. 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.

“If the economy evolves as currently envisaged, the policy rate will continue to lie at 4.5 percent to the end of the year, before gradually being reduced,” says Governor Ida Wolden Bache.

Economic growth is projected to pick up a little in the years ahead, but unemployment is likely to edge up. Inflation is projected to decline further and approach 2 percent towards the end of 2027.

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.

The August policy rate decision will be presented at an event during “Arendalsuka” on 15 August.

Rate effective from 21 June 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

Published 20 June 2024 10:00

Policy rate kept on hold

Introductory statement by Governor Ida Wolden Bache at the press conference following the announcement of the policy rate on 20 June 2024.

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Chart: Policy rate kept unchanged at 4.5 percent

The Monetary Policy and Financial Stability Committee 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.

We have raised the policy rate significantly in recent years in order to tackle high inflation. The economy has cooled and inflation has slowed. But we still have a way to go. Inflation is higher than our target, and the rapid rise in business costs will likely contribute to keeping inflation elevated ahead. It is, therefore, our judgement that there is a need to keep the policy rate at today's level for some time and somewhat longer than we had envisaged earlier.

Let me say a little more about the background for the rate decision and the Committee’s assessments.

Chart: International inflation has slowed sharply

International price inflation has slowed markedly since the peak in 2022, and inflation in the euro area and Sweden is now below 3 percent. Goods inflation is low, while services inflation remains elevated in a number of countries.

In Sweden and the euro area, central bank interest rates have been lowered recently, while there are expectations that central banks in the US and the UK will start cutting rates later this year. Compared with March, when we last presented projections, the market expects fewer rate cuts this year. Norwegian policy rate expectations have also risen slightly.

The interest rate differential between Norway and other countries influences the krone exchange rate. We do not have a policy target for the krone exchange rate, but we are concerned with the krone exchange rate because it affects the outlook for the Norwegian economy. The krone has depreciated over the past couple of years. A weaker krone means an increase in imported goods prices. The past krone depreciation is still contributing to keeping inflation elevated. Since March, the krone has strengthened a little.

Chart: Low growth in the Norwegian economy

The Norwegian economy gradually cooled through 2023, and growth has remained low so far this year. But Norges Bank’s Regional Network enterprises are a little more optimistic than they were earlier this year and expect some increase in activity ahead. There are still wide differences across industries. Companies supplying goods and services to the petroleum industry are still doing well. In the construction industry, activity is low and companies expect a further decline ahead. Sales of new homes are sluggish, but activity in the secondary home market is high and prices have risen markedly so far this year.

Labour market tightness has eased in recent years, as have recruitment difficulties facing businesses. Registered unemployment has increased somewhat from a very low level. At the same time, employment has continued to edge up and the employment-to-population ratio is high.

Chart: Wage growth is high

Wage growth has risen over several years. While pay increases have been high, they have not kept pace with the rise in prices. We expect wage growth to reach 5.2 percent this year, which is the same rate as last year.

Chart: Inflation has slowed, but is still above target

Inflation has fallen markedly since the end of 2022. In May, consumer prices were 3 percent higher than one year ago. Excluding energy prices, which have decreased, inflation is around 4 percent.

In Norway, like in other trading partner countries, goods inflation has fallen sharply, particularly imported goods inflation. Services inflation is still elevated, partly owing to the sharp rise in labour costs in recent years. With modest growth in productivity, higher pay increases mean that businesses are facing higher costs. This could contribute to keeping inflation elevated ahead.

Chart: The policy rate will probably be kept unchanged for some time

In order to bring inflation back to target within a reasonable time horizon, it will likely be necessary to maintain a tight monetary policy stance for somewhat longer than envisaged earlier. In recent months, inflation has been a little lower than expected. At the same time, the economy appears to be performing slightly better than we had expected, and wages appear to be rising faster. Both developments indicate that it will take longer to bring inflation back to target. If the policy rate is lowered prematurely, inflation could remain above target for too long.

If the economy evolves as we currently envisage, we will keep the policy rate at 4.5 percent to the end of the year before a gradual easing of monetary policy can begin. Towards the end of the projection period, the policy rate will be close to what we now assess to be a neutral range somewhat further out. The mortgage interest rate is projected to decline to just above 4 percent. Even though there is substantial uncertainty about the future level of the neutral rate of interest, we must be prepared for a higher interest rate level than we had been accustomed to over the past decade.

Chart: Inflation will slow and unemployment will increase somewhat

Given the current policy rate path, we expect inflation to slow further and approach 2 percent towards the end of 2027. Growth in the Norwegian economy is expected to pick up slightly in the years ahead, but we expect some increase in unemployment. The decline in some business sectors, especially the construction industry, may continue for a while longer before conditions turn around.

Many consumers have less money to spend, which has made it difficult for some people to make ends meet. Interest expenses are set to remain high, but wages are expected to rise faster than prices. Most households will then see their spending power increase and a debt burden that will be easier to bear.

The economy may move on a different path than we now envisage, and the policy rate path may then also change. The policy rate is now likely sufficiently high to bring inflation back to target within a reasonable time horizon. But we cannot say this with certainty. 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. On the other hand, if unemployment rises more than expected or price inflation declines more rapidly, the policy rate may be lowered earlier than we now envisage.

Inflation has come down. This is good news. But we must keep in mind that the last mile of disinflation may take time. To maintain confidence in the inflation target, we must do our job and bring inflation back to the 2 percent target. We will then be able to reap the benefits of our efforts.

40:46

Press conference in connection with the policy rate decision 20 June 2024

Published 20 June 2024 10:00

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 19 June. Based on the Committee's current assessment of the outlook and balance of risks, the policy rate will likely be kept at that level for some time ahead.

Lower international inflation

Consumer price inflation among Norway's main trading partners has slowed considerably from its peak in 2022 and is now below 3% in a number of those countries. Goods inflation is low, while services inflation is still elevated. Economic growth picked up in Q1 and was somewhat higher than projected. Unemployment remains low in the euro area, the UK and the US, while it has risen in Sweden. Wage growth among our main trading partners has slowed, but with lower inflation, household purchasing power will nevertheless increase in many countries this year.

Consumer prices. Twelve-month change. Percent

Source: LSEG Datastream

Expectations of fewer interest rate cuts this year

Since the March Report, central bank interest rates have been reduced in the euro area and Sweden, while they have been left on hold in the US and the UK. The market now expects fewer policy rate cuts in 2024. Long-term government bond yields among our main trading partners have shown little change.

Norwegian policy rate expectations have risen a little. Market pricing indicates expectations of a policy rate cut towards the end of the year. The krone is a little stronger than in March and has recently been broadly as projected.

Import-weighted exchange rate index. I-44

Source: Norges Bank

Growth in the Norwegian economy remains low

Growth in the Norwegian economy slowed last year and was also low in 2024 Q1. A decline in goods consumption contributed to a fall in household consumption, and housing investment declined further from a low level. Economic activity in Q1 was slightly higher than projected. The goods consumption index and card transaction data suggest that household consumption has picked up recently.

Norges Bank’s Regional Network enterprises overall report somewhat higher activity in Q2. In most industries, businesses have grown more optimistic than they were earlier this year and expect a further improvement in Q3. The construction industry expects a continued fall in activity. New homes sales have edged up from a low level, but it will likely take time for housing investment to start rising again. In the secondary market, house prices have continued to rise and have been higher than expected.

GDP for mainland Norway. Three-month moving average. Percent

Sources: Statistics Norway and Norges Bank

Pressures in the Norwegian economy have gradually receded since the beginning of 2023. At the beginning of 2024, output was likely close to potential and capacity utilisation appears to have remained broadly unchanged recently. Registered unemployment has increased slightly over the past couple of years but is still low. The increase in unemployment partly reflects a large number of Ukrainian refugees having registered as unemployed with NAV. In May, registered unemployment was 2%, as projected. Employment rose further in Q1 and was slightly higher than expected. Regional Network enterprises report that capacity utilisation has increased slightly in Q2 but is still lower than normal. They expect employment to increase further, and the number of new job vacancies has continued to increase according to NAV. Capacity utilisation in the economy appears to be slightly higher than anticipated.

Growth in the Norwegian economy is projected to be low in 2024, but activity is expected to be slightly higher than projected in the March Report. The combination of high wage growth and lower inflation will lift household purchasing power, which points to an increase in household consumption ahead. Strong petroleum investment, a further increase in exports and high public demand are expected to sustain activity in the Norwegian economy this year, while a decline in housing and business investment will dampen activity. Capacity utilisation is expected to drift down further in the coming year with output running at somewhat below potential.

Capacity utilisation and labour shortages according to the Regional Network. Percentage shares

Source: Norges Bank

Inflation above target

Inflation has slowed further since the March Report. In May, total consumer price inflation (CPI) was 3.0%, which was somewhat lower than projected. The 12-month rise in the CPI adjusted for tax changes and excluding energy products (CPI-ATE) was 4.1% in May. This was broadly as expected.

It appears that wage growth will be higher in 2024 and 2025 than projected in March. Annual wage growth in 2024 is now projected at 5.2%, which is in line with the negotiated wage norm in manufacturing. Regional Network enterprises have revised up their wage growth expectations for 2025. High wage growth, weak productivity growth and last year’s krone depreciation will likely contribute to keeping inflation elevated ahead.

According to the Expectations Survey, long-term inflation expectations are still somewhat higher than the inflation target of 2%, and expectations showed little change in Q2.

CPI and CPI-ATE. Twelve-month change. Percent

Source: Statistics Norway

Unchanged policy rate 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 counteracting the build-up of financial imbalances.

Since the March Report, inflation has been a little lower than projected, while unemployment has increased as expected. On the other hand, Regional Network enterprises report improved prospects, and it appears that wage growth will be higher than envisaged earlier. This could mean that inflation will be higher ahead than projected in the March Report. 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.

The forecast in this Report indicates that the policy rate will continue to lie at 4.5% to the end of the year, before gradually being reduced. Economic growth is projected to pick up a little in the years ahead, but unemployment is likely to edge up. Inflation is projected to decline further and approach 2% towards the end of 2027.

Sources: Statistics Norway and Norges Bank

The Committee decided unanimously to keep the policy rate unchanged at 4.5%. Based on the Committee's current assessment of the outlook and balance of risks, the policy rate will likely be kept at that level for some time ahead.