MNI NORGES WATCH: Holds And Shows Less Easing Ahead

Norges Bank left its key policy rate unchanged at 4.5% at its March meeting, as widely expected, but delivered a hawkish surprise by edging up its rate projection to show slightly shallower cuts ahead.

The central bank's statement and rate projection point to a single 25-basis-point cut later this year, in the autumn through winter, with inflation shown holding above target throughout its three-year forecast. The rate projection showed the policy rate at 3.07% by the end of 2026, 10 basis point higher than previously predicted, with the message clear that Norges Bank is not minded to cut early or deeply,

“The policy rate will likely need to be maintained at the current level for some time ahead," Governor Ida Wolden Bache stated.

Norges Bank's Monetary Policy and Financial Stability Committee finished its tightening cycle after other advanced economy central banks, with the final 25-basis-point hike taking the rate to 4.5% at its December 2023 meeting. It now looks likely to be one of the latest to start cutting.

INFLATION TARGET

In the Monetary Policy Report, the Norges Bank forecast inflation on its target core measure, CPI-ATE, of 4.1% this year, down from a previous forecast of 4.8%, 3.2% in 2025, down from 3.5% and at 2.7% in 2026, up from 2.5% and still above the 2.0% target at 2.3% in 2027. One upside factor was that mainland demand rose 0.6% in 2023, 0.9 percentage point higher than the central bank previously predicted.

With a higher starting level, Norges Bank still showed slightly higher demand growth rates going forward, with zero this year and 2.0% in 2025, both up 0.2 percentage point from previous forecasts. The forecast for household real disposable income was raised to 1.6% for this year from 1.2%.

"Household consumption and public demand have both been higher than expected" the MPR stated. While its GDP forecast was cut to 0.4% for 2024 from 0.8% previously it was raised for 2025 to 1.8% from 1.2%.

A stronger-than-previously-projected krone, with other central banks expected to start cuts in the summer, and lower energy prices would push down on inflation ahead, Norges Bank said.

So far in Q1, the trade weighted I-44 krone exchange rate was on average 3.3% stronger than projected in the December Report, Norges Bank noted, and it showed it appreciating gently through the three-year forecast.