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The Monetary Policy and Financial Stability Committee of Norges Bank decided at its meeting on December 13 to raise the base interest rate from 4,25 to 4,5%. As the committee is currently assessing the outlook and risk picture, the main interest rate will likely remain at this level for a long time.
Raising the basic interest rate from 4,25 to 4,5%
– We see that the economy is cooling down, but price increases are still too high. The increase in interest rates now reduces the risk of price inflation remaining high for a longer period of time. We will likely keep the key interest rate at 4,5 percent for an extended period of time, says central bank governor Ida Wolden Bache.
Price growth is slightly lower than expected, but still clearly above the 2% target. At the same time, enterprise costs have increased significantly in recent years and there are prospects for continued high wage growth. The crown weakened further. This will enable continued price growth even if price impulses from abroad weaken. Employment is high and unemployment remains low.
The economy is currently cooling down
The interest rate is likely to be close to the level needed to bring price dynamics to the target within a reasonable time. The Commission wants to balance the risk of tightening policy too much with the risk of tightening it too little. The economy is currently cooling down, and the full effects of the rate increases are not yet visible. On the other hand, inflation is high and the weakening krone makes it difficult to reduce inflation. An increase in interest rates now will reduce the risk of high price inflation remaining for a longer period of time.
In the committee's assessment, there will likely be a need to maintain interest rates for a longer period of time in order for price dynamics to return to the target level within a reasonable time. Once price inflation declines and economic conditions dictate, we may begin to lower interest rates again
Once price inflation declines and economic conditions dictate, we may begin to lower interest rates again.
Compared to the previous monetary policy report, the forecast for the key interest rate has changed little in the near term, but will be slightly lower in the future. The forecast indicates that the main interest rate will remain at 4,5%. until autumn next year, after which it will begin to gradually decline.
There is uncertainty about the further development of the Norwegian economy. If cost increases remain high or the krona weakens than forecast, price increases may remain high for longer than we currently anticipate. Then the commission is ready to raise the interest rate again. If the Norwegian economy slows down more strongly or inflation falls faster, interest rates may be lowered earlier than we currently assume.
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Source: Norges Bank
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