MNI INTERVIEW: Cut Surprise Just Timing Issue -Norges Governor

Norges Bank's 25-basis-point cut in its policy rate to 4.25% at its June meeting, which again caught markets off balance after its March hold, puts the Norwegian central bank back on track for gradual easing with the broader economic picture having remained steady for some time, Governor Ida Wolden Bache told MNI. 

March’s delay, which came despite guidance for a cut at the January meeting, had come as the Bank wanted to ensure that an uptick in inflation was transient, Wolden Bache said in an interview, after Norges Bank finally joined other advanced economy central banks in starting its easing cycle, having previously left policy on hold at 4.5% since December 2023.

"The overall picture of the Norwegian economy and the interest rate path hasn't changed dramatically over the past few quarters. Since autumn last year, we indicated that the time was approaching for interest rates to start to come down. We have been confident that inflation would eventually come back to target," she said in an interview.

While unemployment has edged up, "activity in the economy has held up fairly well, so that broad picture has remained the same. But, of course, we got those [inflation] numbers in March, and they were significantly higher than envisaged, and we were uncertain about how permanent those effects would be," she said.

The most recent data showed that core inflation had fallen somewhat more than Norges Bank predicted, she noted.

"We emphasise that it's broad-based. If you look at the momentum in inflation that has come down, and also that we see somewhat weaker international prices coming into our imported goods, which would also push in ... the new direction of somewhat lower inflation.”

HIGHER NEUTRAL RATE, ALTERNATIVE SCENARIOS

Norges Bank's policy committee said that if things unfolded as expected the policy rate would be reduced further this year after the June cut, although the rate does not seem to have very far to fall.  The central bank's projection showed it going down to 3.1% at the end of the forecast period in 2028 while it revised up its range of estimates of the real neutral rate, to between 0.25% and 1.5%, or 2.25% to 3.5% in nominal terms, from  a real 0.0% to 1.0% previously. (See MNI INTERVIEW: Norges' Forecast Rate Shifts Too Predictable)

Wolden Bache cautioned against placing weight on the mid-point of the new range as a guide to any plans to leave policy restrictive.

"It's a conscious choice to focus on the interval for the neutral rate, because the estimates are inherently uncertain ... we don't have a point as such, but it guides our assessment of whether policy is contractionary or expansionary ...if you look at our policy rate, it's moving down to the upper part of our revised interval," she said.

Wolden Bache said that it was important to communicate today’s elevated levels of global uncertainty and left the door open to producing alternative scenarios.

"Whether at some point we will think that publishing a scenario is the best way of communicating that uncertainty that remains to be seen [but] that could very well be so," she said.

Norges Bank has typically assumed that the Norwegian currency will hold pretty much flat but in its June Monetary Policy Report it provided some nuance by looking at options pricing around the krone exchange rate, finding uncertainty more elevated against the U.S. dollar and with the krone more likely to depreciate against the euro. (See MNI INTERVIEW: Norges Bank Needs Scenarios For Krone Weakness)