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Slide: The policy rate remains unchanged at 4.5 percent
The Committee for Monetary Policy and Financial Stability has decided to keep the policy rate unchanged at 4.5 percent.
Norges Bank has been tasked with ensuring low and stable inflation. The goal is a price growth that is close to 2 percent over time. At the same time, we aim to contribute to ensuring that as many people as possible have a job and to a stable economic development.
After price growth accelerated two and a half years ago, we have raised the interest rate significantly, and since December last year, the policy rate has remained at 4.5 percent. The interest rate has contributed to cooling the economy and dampening price growth.
If things unfold as we currently envision, we will maintain the interest rate at today’s level through the end of the year. At the same time, we are approaching the time to lower the interest rate. The forecast we presented at our previous interest rate meeting in September indicated that the rate would be gradually lowered from the first quarter of next year. For this interest rate meeting, we have not made new forecasts, but the outlook for the Norwegian economy does not seem to have changed significantly since September.
Slide: Price growth abroad has decreased significantly from its peak
Internationally, central banks seem to be getting a grip on price growth without significant costs in the form of high unemployment. In several of the countries around us, price growth has now returned to around 2 percent.
In many countries, central banks have begun to lower policy rates. Market participants expect that rates abroad will be further decreased over the next year, but not as much as they anticipated in September. Rates in the USA have risen significantly in recent weeks.
Slide: Price growth is on the way down
In Norway as well, there are indications that we will bring price growth back to the target without a significant rise in unemployment. Price growth has declined significantly from its peak, and over the past year, it has decreased faster than we had estimated. At its highest, consumer price growth was 7.5 percent. It is now 3 percent, which is slightly lower than we anticipated in September.
However, price growth is still above our target, and we believe there are several factors that will slow the further decline. Wage growth is high, and combined with low productivity growth, this results in increased costs for businesses.
Slide: The krone has weakened
Additionally, the krone weakened significantly leading up to last summer. A weaker krone means that the goods we purchase from abroad become more expensive. The krone is now slightly weaker than before the interest rate meeting in September, and a bit weaker than expected. The krone has particularly weakened against the US dollar, which has strengthened against many currencies in recent weeks. The dollar strengthened further in the hours following the election in the USA.
Slide: Unemployment has increased slightly
Since we began to raise interest rates, unemployment has increased somewhat from a very low level. At the end of October, registered unemployment was 2.1 percent, which was in line with our estimate from September. Unemployment is still slightly lower than in the period before the pandemic, and many job positions are being advertised.
Slide: We will likely maintain the rate at today’s level through the year
Our assessment is that there is still a need for a tightening monetary policy to bring price growth down to the target within a reasonable timeframe. The committee is concerned that if the interest rate is lowered too early, price growth may remain above the target for too long. On the other hand, a rate that is too high may slow the economy more than necessary. When we set the interest rate, we must balance these considerations.
There is uncertainty regarding the economic outlook. Leading up to this year’s last interest rate meeting in December, we will receive more information about the economic development. We will also present new forecasts for interest rate outlooks then.
Interview Script:
Editor (Time.news): Welcome to Time.news! Today, we’re discussing Norway’s current economic landscape, particularly focusing on the recent decision by the Committee for Monetary Policy and Financial Stability to maintain the policy rate at 4.5 percent. Joining us is Dr. Ingrid Nilsen, an expert in monetary policy and financial stability.
Dr. Nilsen: Thank you for having me! It’s a pleasure to be here.
Editor: Let’s dive right in. The policy rate has remained unchanged at 4.5 percent since December. What are the reasons for this steady stance, especially considering the significant rate hikes we saw previously?
Dr. Nilsen: That’s a great question! The primary goal of the Norges Bank, as you mentioned, is to achieve low and stable inflation, ideally around 2 percent over time. By keeping the policy rate steady, they’ve successfully cooled down the economy and dampened price growth. After a period of accelerated inflation—where consumer price growth peaked at 7.5 percent—they’re now observing a more stable rate at 3 percent. The decision reflects confidence that the current measures are working.
Editor: Indeed, it seems there’s a cautious optimism. You mentioned the resilience of the Norwegian economy. How does this narrative compare with trends seen in other countries?
Dr. Nilsen: Globally, we see central banks are starting to get inflation under control without drastically increasing unemployment. Many countries around Norway have also managed to return their inflation rates to around 2 percent. Surprisingly, while inflation in the U.S. has recently risen again, other central banks are anticipating decreased rates in the coming year. This international trend underscores that while Norway’s policy rate remains unchanged, the global economic environment is quite dynamic.
Editor: It’s fascinating to see these global interconnections. The article also notes that while price growth is declining, wage growth is notably high. Could you elaborate on the implications of this?
Dr. Nilsen: Yes, that’s crucial. High wage growth coupled with low productivity can lead to increased costs for businesses, which in turn might keep inflation pressures alive. While the decline in price growth is encouraging, the underlying costs associated with wage growth could constrain how quickly we can return to that 2 percent target. It’s a delicate balancing act for the Norges Bank.
Editor: Speaking of balancing acts, the article mentions the weakening of the krone. How does this factor into Norway’s inflation and economic strategy going forward?
Dr. Nilsen: A weaker krone indeed complicates matters. It makes imports more expensive, contributing to the overall price growth. As Norway relies on many imported goods, this depreciation can put upward pressure on inflation, despite the domestic attempts to cool it down. The Norges Bank will need to monitor the krone’s movements closely as they navigate these waters, as it can affect both inflation and the decision on when to lower policy rates.
Editor: Looking forward, what can we expect in terms of interest rates? The article hints at potential reductions in the coming year.
Dr. Nilsen: They certainly plan to gradually lower the interest rate if things align as forecasted. The outlook remains relatively stable since the last assessment in September, so we might see a shift starting in the first quarter of next year. However, that will heavily depend on continued progress on inflation and other economic indicators.
Editor: Thank you, Dr. Nilsen! It’s been enlightening to discuss these complex yet crucial economic dynamics. Do you have any final thoughts for our readers regarding the current state of the Norwegian economy?
Dr. Nilsen: My closing thought would be that while there are challenges ahead, Norway is in a relatively strong position compared to many other nations. The coordinated efforts by policymakers and the responsiveness of the economy to these adjustments will be vital in maintaining stability. Staying informed and adaptable will be key.
Editor: Thank you again for your insights, Dr. Nilsen. We appreciate your time.
Dr. Nilsen: Thank you for having me!