Ida Wolden Bache: Policy rate kept on hold
Introductory statement by Ms Ida Wolden Bache, Governor of Norges Bank (Central
Bank of Norway), at the press conference following Norway's announcement of the
policy rate, Oslo, 20 June 2024.
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presentation accompanying the speech
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-topopulation 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.