Norges Bank Keeps Interest Rate at 4.25%

The Norges Bank kept its policy rate steady at 4.25% in August, in line with market expectations, as inflation slowed more than anticipated over the summer. CPI inflation fell to 3% in July, while underlying inflation declined to 2.7%. However, both measures remain above the central bank’s 2% target, meaning policymakers believe it is too early to conclude that inflation is sustainably moving lower. The Bank therefore maintained its restrictive monetary policy stance and warned that another rate hike could still be necessary. Economic activity and labour-market conditions have developed broadly as expected, although housing prices fell sharply in July and construction remains weak. The krone has recovered somewhat after weakening earlier in the summer. The next major signal will come in September, when new economic forecasts are published and policymakers reassess the future path of interest rates.

The Norges Bank kept its policy rate steady at 4.25% in June, as expected, while signaling that further tightening may be needed as inflation remains too high. Governor Ida Wolden Bache said rising business costs are likely to keep price pressures elevated and that the bank may raise rates again at one of its upcoming meetings. The central bank noted that inflation has stayed above target for several years, while economic activity has softened slightly. Norges Bank said uncertainty remains high due to the Middle East conflict and its impact on energy prices. Oil and gas prices have fallen since March, while the potential reopening of the Strait of Hormuz could reduce external price pressures. The bank’s updated forecast points to a policy rate slightly above 4.5% by year-end. Inflation is expected to gradually decline toward the 2% target by 2029, though the future rate path will depend on inflation and labor market developments.

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.