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Chart 1: Policy rate kept unchanged at 4.5 percent

Norges Bank’s 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.

We have raised the policy rate 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 economy and to dampening inflation. The current outlook suggests that inflation will return to target without a large increase in unemployment.

Inflation fell further towards the end of last year and has moved closer to target. At the same time, the rapid rise in business costs is likely to contribute to stoking inflation ahead. The Committee is concerned with the risk that if the policy rate is lowered too quickly, inflation could remain above target for too long. On the other hand, the Committee does not want to restrain the economy more than needed to stabilise inflation around 2 percent.

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.

We have not made new forecasts for this monetary policy meeting but have assessed new information about economic developments against the forecasts presented in December.

Chart 2: Unemployment is little changed

Growth in the Norwegian economy picked up slightly in 2024. Activity has been lifted by high public demand and large investments in the petroleum industry. At the same time, housing construction has shown a sharp decline. Unemployment has risen somewhat from a low level in recent years. In recent months, unemployment has changed little in line with our December projections.

Chart 3: Inflation has moved closer to target

Inflation has fallen markedly over the past year, and in December inflation stood at 2.2 percent and was lower than expected. However, excluding energy prices, which fluctuate widely, inflation was higher and broadly as projected.

International inflation has also declined markedly and moved closer to inflation targets. Many central banks have cut their policy rates. The market expects further rate cuts ahead, but fewer rate cuts than previously. Since the previous monetary policy meeting, the krone has been slightly weaker than assumed.

We set the policy rate based on conditions in the Norwegian economy, but as a small open economy, we are affected by international developments. The new US administration has announced trade policy changes, but it remains uncertain which measures will be enacted. Should tariffs be raised, global growth will likely slow, but the implications for price prospects in Norway are uncertain.

The Committee will have received more information about economic developments ahead of its next monetary policy meeting in March when new policy rate forecasts will also be presented.

Growth in the Norwegian economy picked up slightly in 2024

Growth in the Norwegian mainland economy picked up slightly in 2024 and unemployment has changed little in recent months. There is uncertainty about future developments in both the global and Norwegian economy. The Committee was concerned with the risk of an increase in international trade barriers. New shocks abroad may impact the Norwegian financial system. Financial system vulnerabilities could amplify a downturn in the Norwegian economy and lead to bank losses.

Firms and households have ample access to credit

Banks reported unchanged credit standards in Norges Bank’s lending survey for 2024 Q4. Banks expect some easing of credit standards for first-home mortgages and point out that changes in the Lending Regulations contribute to this. Credit premiums in the corporate bond market have recently remained close to the average for the past 10 years for firms with high credit ratings, after having fallen in 2024. In Norges Bank’s overall assessment, households and firms have ample access to credit.

Credit growth has accelerated somewhat through autumn

High and rapidly rising debt can amplify economic downturns and increase the risk of financial crises. For a long period, debt rose faster than household income. In recent years, debt growth has been slower than income growth.

Credit growth accelerated somewhat through autumn after having fallen over a long period. House prices rose 6.4 percent in 2024 and was higher in December than projected. Activity in the market for existing homes is high. Slightly more new homes were sold in 2024 than in the preceding year, but housing starts remain low and have continued to fall recently.

Should the debt-to-income ratio decline over time, the household sector could become less vulnerable to interest rate increases and a loss of income. On the other hand, the vulnerability could increase again if looser financial conditions result in rapidly rising house prices and debt.

Better prospects for commercial real estate

Corporate financial positions, particularly in real estate, have weakened somewhat in pace with higher interest rates, but overall corporate sector solvency is strong, see discussion in Financial Stability Report 2024 – H2. Figures for listed companies in 2024 indicate that corporate financial positions have improved somewhat recently, but there are substantial differences between sectors.

Following a sharp fall in 2023, estimated commercial property prices were unchanged through 2024. Owing to high employment, which helps sustain demand for office space, and growth in rental income, most CRE firms have been able to service higher interest expenses out of current earnings. Weaker profitability and solvency may, however, pose problems for firms that need to refinance debt. Lower credit premiums have likely reduced refinancing risk for debt maturing in the coming years. Future developments remain uncertain. Should demand for office space fall markedly and rental income prove markedly lower than expected, many firms could face debt-servicing problems.

The share of bankruptcies among Norwegian firms has risen since the beginning of 2024. The rise has been particularly pronounced among real estate developers, whose profitability has been impaired owing to higher interest rates, high construction costs, lower residential construction activity and sluggish new home sales. Since the pandemic, real estate development has been the sector with the highest relative increase in bankruptcy rates, at over 50%. Bankruptcy rates in most other sectors have also increased somewhat but are still lower than before the pandemic. The share of Norwegian firms facing debt collection was high through 2024, and the share of bankruptcies in Norwegian firms is expected to increase somewhat further in 2025, in particular in the real estate sector.

Capital requirements reflect the vulnerabilities in the Norwegian financial system

The countercyclical buffer rate of 2.5 percent helps maintain bank resilience. Norwegian banks satisfy capital and liquidity requirements by a solid margin and are highly profitable. Banks’ corporate credit losses increased somewhat in the first three quarters of 2024 but are still low. The solvency stress test in Financial Stability Report 2024 H1 shows that banks can absorb large credit losses, while still maintaining lending.

The Committee unanimously decided to keep the countercyclical capital buffer rate at 2.5%.

Ida Wolden Bache
Pål Longva
Øystein Børsum
Ingvild Almås
Steinar Holden

22 January 2025