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.

The policy rate was raised significantly to tackle high inflation and has stood at 4.5% since December 2023. The tightening of monetary policy has contributed to cooling down the Norwegian economy and to dampening inflation. Unemployment has edged up in recent years, albeit from a low level. The output gap has narrowed, and output is now close to potential. Inflation has fallen markedly from the peak but is still above target. High growth in business costs is likely to stoke inflation ahead.

The world economy is marked by the changed environment for international trade. Since the previous Report published in December 2024, tariffs have been imposed on a range of goods. Higher tariffs and trade policy uncertainty are expected to reduce global economic growth, but the tariffs implemented to date will probably have a limited impact on economic activity in Norway. On the other hand, increased defence investment could boost activity in Europe. The projections imply that overall economic growth among Norway’s trading partners will be somewhat lower this year than assumed in the previous Report. Higher tariffs alone could lead to higher international inflation, while lower global growth could dampen inflation. The effects of higher tariffs on domestic inflation are uncertain.

The Committee gave special attention to the fact that inflation has picked up in recent months and has been markedly higher than projected. Twelve-month CPI inflation increased to 3.6% in February, while CPI inflation adjusted for tax changes and excluding energy products (CPI-ATE) rose to 3.4%. The unexpected increase in inflation makes it more difficult to project the future path of inflation. Food prices made a substantial contribution to the increase in inflation in February. Some of the increase may reflect changes in seasonal patterns, suggesting that food prices may rise at a slower pace ahead than previously assumed. At the same time, prices for a wide range of other goods and services increased more than expected. The Committee noted that inflation is now somewhat more consistent with that implied by the historical relationships between inflation and underlying driving forces, after having been lower than that for a period. The Committee also considered the fact that overall wage growth reached 5.6% in 2024, which was higher than the norm for the wage settlement in manufacturing and higher than projected in the previous Report. Wage growth turned out higher than the wage norm for most industries. At the same time, manufacturing profitability remains solid, and the wage share is low. The Committee judges that there are now several conditions suggesting that inflation will continue to run at a higher rate than projected in the previous Report.

Both international and Norwegian policy rate expectations have increased, and the Committee noted that market interest rates are now higher than the policy rate forecast in the previous Report. Market interest rates increased and the krone exchange rate appreciated following the publication of the latest inflation figures. The krone exchange rate has recently strengthened a bit further and is stronger than projected.

According to national accounts data, economic activity fell towards the end of 2024, and the Committee noted a further fall in housing investment. On the other hand, employment has risen further, and unemployment has shown a small decline. House prices have increased more than expected, and Norges Bank’s Regional Network contacts report increased activity over winter.

The Committee judges that a restrictive monetary policy is still needed to bring inflation down to target within a reasonable time horizon. The Committee noted that with the policy rate path presented in the previous Report the inflation projections would be higher and lie markedly above target this year and next. If the policy rate is lowered prematurely, prices may continue to rise rapidly. On the other hand, an overly tight monetary policy could restrict the economy more than needed to bring inflation down to target. Weighing these trade-offs, the Committee judges that the current stance is warranted for somewhat longer than previously signalled.

The policy rate forecast in this Report is consistent with a decline in the policy rate to 4% by the end of the year, followed by a gradual further decline over the next years. The forecast has been revised up somewhat from the previous Report. Growth in the Norwegian economy is expected to pick up a little in the years ahead. Registered unemployment is likely to increase slightly to around pre-pandemic levels. Inflation is projected to move down and be close to 2% towards the end of 2028.

Chart The current monetary policy stance is warranted for somewhat longer

The uncertainty surrounding the outlook is greater than normal, and the future path of the policy rate will depend on economic developments. If more extensive trade restrictions were to lead to a global economic downturn, the outlook for the Norwegian economy could also weaken. If the pickup in inflation proves more temporary than currently assumed or unemployment rises more than projected, the policy rate may be reduced faster than currently envisaged. If prospects suggest that wage and price inflation will remain elevated for longer than projected, a higher policy rate than currently envisaged may be required.

The Committee unanimously decided to keep the policy rate unchanged at 4.5%. There is uncertainty about future economic developments, but the Committee’s current assessment of the outlook implies that the policy rate will most likely be reduced in the course of 2025.

Ida Wolden Bache
Pål Longva
Øystein Børsum
Ingvild Almås
Steinar Holden

26 March 2025