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NORGES BANK: Judgement Factor Has Dovish Impact On December Rate Path

NORGES BANK
Central Bank NewsCEEMEANorges BankBulletNorwayMarketsFixed Income BulletsForeign Exchange Bullets

The Norges Bank “judgement factor” was actually negative through the forecast horizon. This means the policy rate path implied by the bank’s models was more hawkish than the baseline presented in the December MPR.

  • As such, although the model-implied reaction function suggests policy rates may need to be held at 4.50% a little longer, Norges Bank sees the need to stick to its prior guidance and begin easing policy from Q1 next year.
  • Looking at the contributions to the model-implied path relative to September: Domestic demand was the largest upside contributor, as expected. Money market premiums, petroleum prices and investments, and external factors also pushed the rate path higher.
  • The prices and wages component was surprisingly a downward contributor. Most analysts had expected a broadly neutral impact here, following the Q4 Regional Network Survey, where 2025 wage expectations were revised up to 4.5% (vs 4.3% prior). In fact, Norges Bank downgraded its 2025 wage projection by 10bps to 4.2%.
  • The exchange rate was a negligible contributor, as expected.
  • The MPR notes that “At the end of 2026, the real interest rate is projected to be around 0.9%, which is in the upper range of the neutral real interest rate estimate”.

 

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The Norges Bank “judgement factor” was actually negative through the forecast horizon. This means the policy rate path implied by the bank’s models was more hawkish than the baseline presented in the December MPR.

  • As such, although the model-implied reaction function suggests policy rates may need to be held at 4.50% a little longer, Norges Bank sees the need to stick to its prior guidance and begin easing policy from Q1 next year.
  • Looking at the contributions to the model-implied path relative to September: Domestic demand was the largest upside contributor, as expected. Money market premiums, petroleum prices and investments, and external factors also pushed the rate path higher.
  • The prices and wages component was surprisingly a downward contributor. Most analysts had expected a broadly neutral impact here, following the Q4 Regional Network Survey, where 2025 wage expectations were revised up to 4.5% (vs 4.3% prior). In fact, Norges Bank downgraded its 2025 wage projection by 10bps to 4.2%.
  • The exchange rate was a negligible contributor, as expected.
  • The MPR notes that “At the end of 2026, the real interest rate is projected to be around 0.9%, which is in the upper range of the neutral real interest rate estimate”.