MNI NORGES WATCH: Rate Hold, Guidance For To 1 Or 2 More Cuts

Norges Bank left its policy rate on hold at 4.25% at its August meeting and provided no additional steer as to whether there will be one or two more cuts in 2025.

The unchanged decision had been fully expected, though the central bank dashed any hopes it would be more specific on the timing of the next cut, instead sticking to its guidance that if things evolved as expected "the policy rate will be reduced further in the course of 2025,” with its previous projections compatible with either one or two more cuts.

The market reaction in light of the decision and accompanying analysis suggested they were seen as more hawkish than anticipated, with the krone rising 0.25% against the Swedish krona following the announcement. While a September cut has been fully priced in the odds on a December one declined somewhat.

The August meeting was an interim one with no new economic forecasts, but June’s projections showed the policy rate falling to just below 4% by end 2025, leaving a second 25-basis-point cut in doubt.

CAUTIOUS NORMALISATION

Governor Ida Wolden Bache said that it would likely be appropriate to continue with "cautious normalisation" and that the outlook for the Norwegian economy remained broadly in line with the June projections, which would suggest the one or two cuts question remains open. (See MNI INTERVIEW: Cut Surprise Just Timing Issue -Norges Governor)

"The June forecast indicates a decline in the policy rate to about 3% in 2028. As such, we do not envisage a large decline in the policy rate,” Wolden Bache said in her opening statement at the press conference following the meeting.

The analysis accompanying the policy decision downplayed the significance of recent domestic and international developments.

New tariffs imposed by the U.S. were "somewhat higher overall than assumed in June" but they were "expected to have little impact on inflation in Norway,” it said.

The krone depreciated at the end of June as oil prices fell but has since "held fairly steady", and while inflation was 3.1% on the target measure due to food and services, lower wage growth was expected to push it down later. A reduction in childcare prices was expected to lower inflation over the coming year but to have little impact further out.

In the labour market, employment has risen, vacancies were deemed to be still high and the bank's analysis highlighted uncertainty over unemployment data.

The central bank's policy committee concluded that it needed to keep the interest rate in restrictive territory, with the job of squeezing out inflation not yet completed.