Ida Wolden Bache: Norges Bank is raising the policy rate to bring
down inflation
Introductory statement by Ms Ida Wolden Bache, Governor of Norges Bank (Central
Bank of Norway), at a press conference following the announcement of the policy rate,
Oslo, 3 November 2022.
* * *
Accompanying charts of the speech.
Introduction
Chart 1: Policy rate raised from 2.25 to 2.5 percent
Norges Bank's Monetary Policy and Financial Stability Committee decided
unanimously to raise the policy rate by 0.25 percentage point to 2.5 percent.
Norges Bank's task is to keep inflation low and stable. The operational target is inflation
of close to 2 per cent over time. We are also mandated to help keep employment as
high as possible and to promote economic stability over time.
Economic activity is high in Norway, and unemployment is at a historically low level. At
the same time, we are seeing that some areas of the economy are cooling down.
Inflation is very high. Many people are experiencing how demanding it can be to cope
with rapid and unexpected price increases. High inflation is weakening households'
purchasing power and hampering economic decision making for both firms and
households. We believe that a higher policy rate is needed to curb inflation.
In its deliberations, the Committee was concerned with balancing the risk of tightening
too much against the risk of tightening too little.
If we do not tighten monetary policy enough, there is a risk that inflation will gain a
foothold at a high level, and that it will be necessary to raise the policy rate even higher
at a later stage to reduce inflation. On the other hand, if we raise the policy rate too
much, we might dampen the economy more than necessary, which is something we
want to avoid. We believe that we can achieve an appropriate balance of these risks by
raising the policy rate by 0.25 percentage point now.
Let me a say a little more about the background for the policy rate decision. New
forecasts have not been prepared for this monetary policy meeting, but we have
assessed new information against the projections we presented in September.
Chart 2: Gas and electricity prices have declined
Prices are rising rapidly among our trading partners, and inflation has been higher than
projected in the previous Monetary Policy Report . But both gas and electricity prices
have recently fallen from high levels. Global freight prices are still high but have fallen
recently and more than we had anticipated.
Many central banks have responded to the surge in inflation by raising policy rates
further in recent weeks, and policy rate expectations have increased. Higher interest
rates could lead to slower growth ahead than we projected earlier.
Chart 3: Unemployment is low
Domestic activity was higher through the summer months than assumed earlier.
Household consumption has been higher than expected. At the same, we are seeing
signs of a cooling housing market. House prices fell more than we had expected in
September, and the number of unsold homes has increased. According to Statistics
Norway's business sentiment survey, the prospects for manufacturing have weakened.
The labour market is tight, and the employment ratio is high. The number of employed
appears to be slightly higher than expected, while the number of unemployed has been
a little lower. The number of job vacancies is high, but the number of new vacancies
has decreased slightly.
Chart 4: Inflation is high
Inflation has continued to edge higher and is markedly above our target of 2 percent. In
the year to September 2022, consumer prices rose by almost 7 percent. Energy prices
were a main driver, but prices are also rising rapidly for a range of other goods and
services, both for domestically produced and imported goods and services.
In September inflation was higher than we had expected, with a surprisingly sharp rise
in transport prices, which tend to vary widely.
The Committee judges that a higher policy rate is needed to bring inflation down
towards the target.
Inflation has increased more than projected, and the labour market appears to be a little
tighter than previously anticipated. These developments could suggest raising the
policy rate by more than 0.25 percentage point at this meeting.
On the other hand, there are signs that some areas of the economy are cooling down,
and prospects for lower-than-expected freight and energy prices may curb inflation
ahead. The policy rate has been raised markedly over a short period, and monetary
policy is beginning to have a tightening effect on the economy. This may suggest a
more gradual approach to policy rate setting.
The future policy rate path will depend on how the economy evolves. The outlook is
more uncertain than normal, but we will most likely raise the policy rate again in
December, when we will also present this year's fourth Monetary Policy Report with
new forecasts for the Norwegian economy.