Norges Bank Holds Policy Rate at 4.5%, Keeps the Door Open to Another Hike

Norges Bank's Monetary Policy and Financial Stability Committee left the policy rate at 4.5 percent at its meeting on 4 November, holding where it had been since September, while Governor Ida Wolden Bache said the bank is "prepared to raise the policy rate if needed" to bring inflation back to target. The decision was announced on 5 November, the same day the Bank of England hiked its rate for the first time in three years, and it confirmed that Norway's central bank is parked at a holding level from which another increase is the live risk.

In its press release accompanying the decision, Norges Bank made plain that this was a pause, not an end. "Inflation is too high," the committee said. "It will likely be necessary to keep the policy rate elevated for a time, and we are prepared to raise the policy rate if needed to bring inflation down to target within a reasonable time horizon." That sentence, carried in the governor's own words, is the hawkish spine of the release: no new forecasts were prepared for this meeting, but the bank explicitly refused to rule out another hike if the inflation outlook warrants it.

Related reading: Bank of Japan holds rates at 1.25 percent, signals a December hike.

What the committee did not do matters as much as what it said. It did not promise a hike, and it reiterated that it does not "want to restrict the economy more than needed." It also judged that the outlook had not changed materially since the September meeting, at which it lifted the rate a quarter point to 4.5 percent. The picture it painted is one of an economy running slightly below normal capacity with inflation sticky well above target.

Inflation is running more than a point above target

Norway's twelve-month CPI inflation was 3.4 percent in September, and the measure that strips energy and tax changes, CPI-ATE, was 3.0 percent. Both sit above the 2 percent objective, and the bank noted that inflation has now been above target for several years. The committee attributed much of the recent pressure to the conflicts in the Middle East, which have kept energy and electricity prices elevated. Oil spot prices have fallen since September, it said, but futures for oil, gas and electricity have moved up, and indicators of external price impulses to imported goods have risen further than assumed.

For the broader framework, see our Fed policy coverage.

Related reading: Bank of England Rate Decision: Bank Rate Raised to 4% in an 8-1 Vote, CPI Seen Peaking Near 5%.

Domestically, the message was mixed. The bank said domestically produced goods and services inflation "remains elevated and has been higher than projected," and that years of rapid business-cost growth will likely keep inflation elevated ahead. At the same time, registered unemployment has run a little lower than projected and employment has risen a bit more than expected. The committee's concern is the classic second-round one: high inflation sustained over time can become sticky and harder to bring down.

The krone has already done some of the tightening

The most market-relevant line in the release was a currency observation: the krone "has appreciated and is stronger than assumed." The stronger currency is a cross-wind that dampens imported-goods inflation in isolation, and it partly explains why Norges Bank could hold while other central banks moved. The krone traded at 10.44 per euro and 9.29 per dollar on Thursday, near the strong end of its one-year range of roughly 10.27 to 12.01 against the euro. Data compiled by Dow Jones showed the currency has climbed against the euro since July, which pulls down the cost of imports even as it erodes the competitiveness of Norwegian exporters.

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For the dollar investor, the angle runs through the currency and the energy complex rather than a dedicated US-listed vehicle. Norway is a net energy exporter, so the same Middle East shock that is squeezing importing economies transmits differently here: the oil-and-gas revenue cushion plus a stronger krone offset much of the imported-inflation problem. What remains is a policy rate among the highest in Europe and a central bank openly unwilling to say it is done. That combination is why the market sees another hike as the pressure release valve if inflation does not recede.

The decision does not materially change the backdrop Norges Bank has held since September, so it should weigh directionally little on the currency. The next fork is a dated one: the committee meets again on 17 December, when Monetary Policy Report 4/26 is published together with the rate decision and new forecasts. That is where the "if needed" phrasing meets numbers. Until then the policy rate sits at 4.5 percent, and the krone's recent strength is the quiet disinflationary force doing some of the committee's work for it.

Related reading: Fed December rate hike odds near 74%: a 10-2 hold, a payroll test, and the 10-year's run at 5%.

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