MNI INTERVIEW: Norges Bank Head Tilts Against Precise Guidance

Over-precise guidance can be falsely interpreted as a clear commitment to particular policy action, Norges Bank Governor Ida Wolden Bache told MNI, speaking after Norway’s central bank twice wrong-footed market participants earlier this year as the outlook has become more inflationary.

"This is something that we discuss at every meeting, how we best can convey our message. We are conscious that giving very precise signals about what to do at the next meeting can be given too large weight, and to a large extent have been interpreted as a promise," Wolden Bache said in an interview after Norges Bank’s September meeting, which concluded with both a 25-basis-point cut and a shift higher in the projected rate path.

Norges Bank started 2025 steering to a March beginning to its easing cycle, but then delayed until June, surprising investors each time. The March delay was prompted by stronger-than-predicted inflation data. 

"We were uncertain about whether that was temporary, or more permanent factors [were] contributing to that,” Wolden Bache said. “[We] have some confidence some of that was indeed temporary, and we've seen some evidence of that." 

This does not mean however that the central bank is now more confident about the inflation outlook, she noted.

Norges Bank’s September guidance is much vaguer - that the policy rate would be reduced "in the coming year" if things evolved as projected.

The debate now centres on "higher underlying inflation pressures, and the question about how long that will push up inflation, and how long it will take to get inflation back to target. So it's a different kind of risk assessment, but I wouldn't characterise one as as being more confident or less confident," the governor said. (See MNI INTERVIEW: Cut Surprise Just Timing Issue -Norges Governor)

FOCUS ON SEPTEMBER

Ahead of the September meeting, which saw the policy rate reduced to 4.0%, analysts were divided over whether a cut would come now or in December, but Wolden Bache said the committee’s debate focussed solely on this month.

"We considered two alternatives, keeping the policy rate unchanged and cutting it, and the committee landed unanimously on the decision to cut rates," she said.

Norges Bank's Monetary Policy and Financial Stability Committee stated in September’s guidance that if the economy evolved broadly as projected it would lower the rate again "in the course of the coming year," but with its rate path pointing to just one 25-basis-point cut a year through to 2028, with the terminal level at 3.3%.

The higher estimate of near-term productivity growth which had permitted June’s increase in projected potential output is assumed to be only temporary in September’s forecast. Wolden Bache noted that recent productivity growth had been very weak, though it has picked up somewhat more than projected.

“So for this year, we revised up our productivity growth quite significantly, but we expect it to return to the more long-term trend going forward, but that's still a higher level than we had a few years back,” she said.

SPARE CAPACITY

At the same time, Bank economists assume that there will be less spare capacity and that that will push up on inflation despite the near-term productivity pick-up.

"We have less spare capacity because we have revised up activity more than the productivity estimate, and we build that on, among other things, to what we hear from the contacts in our regional network, which now say that a somewhat larger share of the companies report having problems recruiting labour. So we have revised upwards our estimate of the output gap," she said.

Norway’s mainland economy is what matters for monetary policy, rather than the ups and downs of the extensive offshore energy sector, Wolden Bache said. Mainland, or non-oil and gas, economic growth is forecast to slow from 2.0% this year to 1.5% in 2026 and just 1.3% in 2027 and 2028.