Stability Amidst Anticipated Steady Borrowing Costs
The announcement received support from analysts, with borrowing costs expected to remain at the present level for the foreseeable future. Norges Bank’s decision has contributed to the strengthening of the Norwegian crown, which rose to 11.34 against the euro at 1013 GMT from 11.38 prior to the announcement. The central bank had previously raised the benchmark rate unexpectedly in December, seeking to combat price pressures and stabilize the currency. The bank highlighted the considerable increase in business costs over the past few years, citing the likelihood of continued high wage growth and the depreciation of the crown throughout 2023, which could restrict disinflation.
Core Inflation Concerns and Projections for Future Rate Adjustments
In December, Norway’s core inflation dropped to 5.5% year-on-year, marking a 15-month low compared to the record high of 7.0% in June. While this figure surpasses the central bank’s target of 2.0%, the bank did not release updated economic forecasts or a new forward rate curve. Such information is anticipated to be provided during the next policy decision announcement scheduled for March 21. Norges Bank’s current primary scenario, as communicated last month, is for rates to begin declining towards the end of 2024 as inflation subsides.
Potential for Earlier Rate Cuts
During the briefing, Governor Bache mentioned that if the Norwegian economy experiences a more significant slowdown or if inflation declines more rapidly, the policy rate may be reduced earlier than initially planned in December. In a Reuters poll, a majority of economists predicted two rate cuts of 25 basis points each in the July-September and October-December quarters of 2024, bringing the benchmark rate to 4.0% by year-end. However, Nordea Markets cautioned that money market rates indicating four rate cuts this year are likely to be inaccurate and anticipate the first reduction to come in September.