Norges Bank Raises Key Rate to 4.25%

The Norges Bank unexpectedly raised its policy rate by 25 basis points to 4.25% at its May meeting, defying market expectations for no change. The central bank emphasized that inflation remains too high and is likely to stay elevated due to the ongoing Middle East war. Policymakers argued that a higher policy rate is necessary to bring inflation back to target within a reasonable timeframe, warning that prolonged high inflation could lead firms and households to expect persistently elevated prices, making it harder to tame later. Despite significant uncertainty about future economic developments, the bank noted that its monetary policy outlook has not materially changed since March, with projections still pointing to a policy rate between 4.25% and 4.5% by year-end.

The Norges Bank kept its policy rate steady at 4% in March, as expected, but revised its forecast upward, signaling a likely increase to 4.25–4.5% by year-end. Policymakers pointed to stubbornly high inflation, exacerbated by Middle East tensions, and elevated uncertainty in oil and gas markets as key drivers. While a tighter policy is expected to gradually reduce inflation to the 2% target by 2029, it may also slow economic growth, pushing unemployment toward pre-pandemic levels. The bank stressed it will await further data before deciding on the timing of the next move.

The Norges Bank left its policy rate unchanged at 4% at its first meeting of 2026, as widely expected. While acknowledging elevated uncertainty, the bank said rates could be lowered later in the year if the economy evolves as projected. Policymakers stressed that a restrictive monetary stance is still warranted, as inflation remains above target. They cautioned that easing policy too quickly could allow inflation to stay elevated for an extended period. At the same time, the bank warned that maintaining an overly tight stance for too long could weigh unnecessarily on economic activity and restrain growth more than required to bring inflation back to target. The Norges Bank reaffirmed its December rate forecast, which points to one to two rate cuts in 2026, despite heightened geopolitical uncertainty. However, officials emphasized that policy remains data-dependent and that both rate cuts and hikes remain possible, depending on how the economy and inflation evolve.