Norway's Central Bank Keeps Rate on Hold, Plans March Cut

The Norges Bank, Norway's central bank, has decided to keep its policy rate unchanged at 4.5% for the time being, while signaling a potential cut in March. This decision comes amidst concerns about global trade barriers and tariffs, as well as the Norwegian krone's exchange rate and inflation dynamics. Let's delve into the factors influencing the bank's decision and the potential impacts on Norway's economy.



The Norges Bank's decision to maintain the policy rate at 4.5% is a balancing act between the risks posed by the krone's depreciation and the need to control inflation. The Norwegian krone has been under pressure, depreciating significantly, which can lead to higher import prices and contribute to inflation. However, the bank has acknowledged that the krone's depreciation has also contributed to cooling down the Norwegian economy and dampening inflation.

Inflation has been moving closer to the target of 2% over time, but the rapid rise in business costs is likely to contribute to stoking inflation ahead. The Norges Bank has been using interest rates to curb inflation and boost the weakened Norwegian krone. The bank stated that "a restrictive monetary policy is still needed to stabilise inflation around target, but that the time to begin easing monetary policy is soon approaching" (Source: Norges Bank's monetary policy decision, January 23, 2025).

Global trade barriers and tariffs, particularly those threatened by U.S. President Trump, pose potential risks to Norway's economy and the Norges Bank's monetary policy strategy. Higher tariffs can dampen global growth, which can indirectly affect Norway's economy, which is heavily reliant on exports. A slowdown in global economic growth can lead to reduced demand for Norwegian exports, negatively impacting the country's GDP and overall economic growth. The Norges Bank has expressed concern about the risk of more extensive trade barriers internationally, noting that increased tariffs could dampen global growth, but the consequences for the price outlook in Norway are uncertain.

The Norges Bank's assessment of the Norwegian economy's output gap and unemployment levels also factors into its decision to ease monetary policy in March. The bank operates a flexible inflation targeting regime, which means it considers both variability in inflation and variability in output and employment. In the December 2024 Monetary Policy Report, Norges Bank noted that underlying consumer price inflation and unemployment have been broadly as projected since the previous meeting. However, overall consumer price inflation has been lower than expected, suggesting that the Norwegian economy might be operating below its potential output, indicating a negative output gap. Additionally, unemployment has edged up from a low level, which is another sign of a potential negative output gap. A negative output gap implies that the economy has spare capacity, and easing monetary policy could help stimulate demand and reduce unemployment without causing inflation to overshoot the target.

Given these factors, Norges Bank judges that a restrictive monetary policy is still needed to stabilise inflation around target, but that the time to begin easing monetary policy is soon approaching. The Committee expects to reduce the policy rate in March, indicating that the output gap and unemployment levels are significant factors in their decision to ease monetary policy.

In conclusion, the Norges Bank's decision to keep the policy rate on hold and plan a March cut is a response to the dynamics of the Norwegian krone's exchange rate, inflation, global trade barriers, and the Norwegian economy's output gap and unemployment levels. As the bank continues to monitor these factors, it will make a more informed decision about the appropriate monetary policy strategy to maintain low and stable inflation in Norway.