Norges Bank Holds Key Rate Steady, Still Eyes March Cut

Norges Bank, the central bank of Norway, kept its key policy rate unchanged at 4.5% during its December 2024 meeting, in line with market expectations. However, the bank signaled that rates will most likely be reduced in March 2025, as the Committee judges that a restrictive monetary policy is still needed to stabilize inflation around target. The bank's decision comes amidst a backdrop of high inflation, economic cooling, and uncertainty about the global economic outlook.

The bank's decision to keep the rate unchanged was influenced by several key factors. Firstly, inflation remains above the 2% target, and the rapid rise in business costs is expected to restrain further disinflation. Secondly, the elevated interest rate has contributed to cooling down the Norwegian economy, with growth remaining muted and unemployment edging up from its lower level. Lastly, the significant depreciation of the krone also warrants a prolongation of high interest rates, as a weaker krone can lead to higher import prices, which in turn can contribute to higher inflation.

The war in Ukraine has created heightened uncertainty about the outlook for global growth and inflation, which may influence Norges Bank's future policy decisions. The Committee noted that the economic upturn among trading partners is expected to continue, but growth prospects appear to be weaker than projected in the September Report. The projections for global price and wage inflation are higher than in December, which could impact Norway's trading partners and, in turn, affect the Norwegian economy.

Norges Bank's communication has played a significant role in shaping market expectations for the policy rate. In December 2024, the bank signaled that rates would likely be reduced in March 2025, leading market participants to expect a rate cut in the near future. However, subsequent developments, such as the war in Ukraine and its impact on global growth and inflation, have led to a reassessment of these expectations. In March 2025, the bank raised the policy rate from 0.5% to 0.75%, indicating a more hawkish stance than previously expected. This decision was driven by higher wage growth and imported goods inflation, which suggested that inflation would remain above the target for some time.

In conclusion, Norges Bank's decision to keep the policy rate unchanged at 4.5% in December 2024, while signaling a potential cut in March 2025, reflects the bank's assessment of the current economic situation and its commitment to maintaining low and stable inflation. The bank's communication has played a crucial role in shaping market expectations, and future policy decisions will be influenced by the evolving economic landscape, including global uncertainty and inflation dynamics.