Norges Bank holds rate at 4.25%, flags hike above 4.5% by year-end

Norges Bank held its key policy rate at 4.25% on Thursday but raised its year-end forecast to just above 4.5%, indicating a rate increase later this year as core inflation remains stuck at 3.4% — more than a full percentage point above the 2% target and above the 3.2% level the bank had anticipated earlier this year.

"Inflation is too high, and the rapid rise in business costs in recent years will contribute to keeping inflation elevated ahead," Ida Wolden Bache, governor of Norges Bank, said in a statement. "If developments turn out as currently envisaged, the policy rate will be raised at one of the forthcoming monetary policy meetings."

The krone weakened 0.5% to 9.65 against the dollar after the decision, reversing some of the gains from the oil price surge triggered by the Middle East conflict. Annual core inflation has exceeded the 2% target for more than four years, while wage settlements this spring topped 4%, adding to cost pressures across the mainland economy. The bank's monetary policy committee opted against the quarter-point increase that some economists had anticipated before summer.

The hawkish hold puts Norges Bank on a diverging path from several global peers. The Federal Reserve held rates at 3.5% to 3.75% on Wednesday with nine of 18 FOMC members projecting a hike this year, while the Bank of Canada also held steady. The European Central Bank raised rates by 25 basis points on June 11, and the Bank of Japan pushed its benchmark to 1% — its highest since 1995 — on June 16. Norway's next policy meeting in August will determine whether the bank follows through on its tightening bias.

Inflation Persists Above Target

Norway's core inflation reading of 3.4% has remained above the central bank's 2% objective for over four years, driven by rising business costs and the energy price shock from the Middle East conflict. The bank's previous forecast had pointed to a year-end policy rate between 4.25% and 4.5%; the updated projection now sits just above 4.5%, reflecting the committee's growing concern that price pressures are becoming entrenched.

Bache noted that a potential US-Iran peace deal could ease price pressures if energy markets normalize quickly, but the committee remains wary of second-round effects through wages and business costs. The overnight lending rate stands at 5.25% and the reserve rate at 3.25%, maintaining the bank's broader tightening stance even as the policy rate remains on hold.

"New information indicates that inflation pressures are slightly stronger than we had anticipated earlier," Bache said, explaining the committee's decision to hold rather than cut, as some market participants had speculated earlier in the year.

Krone Under Pressure

The krone's weakening to 9.65 per dollar highlights the currency's sensitivity to both oil prices and rate differentials. Norway's oil-fueled economy had benefited from the surge in crude after the Strait of Hormuz closure sent Brent above $80 a barrel, but prices have since retreated as a US-Iran agreement took shape. A rate hike later this year could provide support for the krone, though at the cost of further dampening domestic economic activity.

The last time Norges Bank indicated a similar tightening trajectory was in late 2023, when it raised rates to 4.25% before holding through 2024 and 2025. The current cycle marks a potential reversal of that extended pause, with the bank now projecting rates above 4.5% by year-end.

Both Kjersti Haugland at DNB and Marius Gonsholt Hov at Handelsbanken had predicted the bank would hold off on a rate increase for now, citing the balance between a weakening domestic economy and persistent inflation. The mainland economy — excluding oil and gas — has grown slightly weaker than anticipated, adding to the complexity of the bank's policy calculus.

This article is for informational purposes only and does not constitute investment advice.