Norway's Central Bank Holds Firm on Interest Rates While Europe Eases

While central banks across Europe are beginning to ease their aggressive monetary policies to combat inflation, Norway's central bank, Norges Bank, has opted to keep rates high, according to a note published by Morningstar yesterday.

High Inflation and Strong Economy Prevent Cuts

Norges Bank is expected to maintain its current policy rate, the highest since November 2008, through the end of 2024 and into spring 2025. Kjetil Olsen, Chief Economist at Nordea, explains that the bank is concerned about persistently high inflation, which remained at 3.2% in the latest reading. He also notes that unemployment in Norway is at an historic low, demonstrating a strong and resilient economy.

Oil and Gas Boom Propels Growth

The Norwegian economy has been bolstered by a strong oil and gas sector, which has benefited from tax incentives implemented during the COVID-19 pandemic, prompting companies to accelerate investments. "The sector makes up a big share of the economy and has acted as a buffer," Olsen explains.

Wage Growth and Household Purchasing Power Remain Strong

Despite other sectors facing difficulties, the oil and gas boom has contributed to wage growth exceeding 5% for the second consecutive year. This, coupled with inflation hovering around 3%, has resulted in positive real wage growth for Norwegians, boosting consumption. Notably, average Norwegian families with maximum debt are projected to see their purchasing power surpass pre-pandemic levels this year, in stark contrast to Sweden, where households have experienced a 20% decline.

Weak Currency Poses Challenges

Similar to other small, open economies, Norway's exchange rate (NOK) plays a critical role in inflation dynamics. The weakening of the NOK has imported higher inflation and could impact the profitability of the oil and gas sector, according to Amanda Sundström, International Chief Strategist Norway at SEB, in a comment to Morningstar.

Sundström argues that while the exchange rate is a significant factor, central banks in small, open economies should avoid overly tying their monetary policy to it due to its dependence on global factors. However, Kjetil Olsen downplays the impact of imported inflation, as Norway imports a minimal amount of goods compared to its exports, and its reliance on domestic raw materials strengthens its economy.

Outlook for Future Rate Cuts

Norges Bank projects a first rate cut in the first quarter of 2025, culminating in four cuts throughout the year, bringing the key rate to 3.73%. Nordea, however, expects only two rate cuts in 2025, citing a more robust growth outlook. SEB, which initially predicted a December rate cut, has also revised their forecasts for a first cut in March 2025.