Norway's Central Bank Holds Rates Steady Amid Inflation Concerns

Norway's central bank maintained its policy interest rate at a 16-year high of 4.50%, deferring any rate cuts until 2025 owing to inflation concerns and currency weaknesses. Analysts had anticipated the decision, noting heightened inflation and the weak Norwegian crown as key factors impacting the bank's projections.

Norway's central bank held its policy interest rate at a 16-year high of 4.50% on Thursday, as unanimously expected by analysts, and postponed the prospect of a rate cut until 2025 from a previous plan to reduce borrowing costs in September this year. "If the economy evolves as currently envisaged, the policy rate will continue to lie at 4.5% to the end of the year, before gradually being reduced," Norges Bank Governor Ida Wolden Bache said in a statement.

The Norwegian crown strengthened to 11.28 against the euro at 0823 GMT, from 11.35 just before the announcement by the monetary policy committee. Norges Bank had last month said a rate cut could be delayed beyond its previous prediction of a September easing, but had declined to give a specific forecast amid persistent inflation and a weak Norwegian currency.

Analysts were divided ahead of Thursday's announcement over when the central bank could start to ease, with forecasts ranging from the third quarter of this year until the first quarter of 2025. Norges Bank now expects core consumer prices to rise by 4.0% this year, down from 4.1% seen in March. Core inflation stood at 4.1% year-on-year in May, down from a record 7.0% in mid-2023 but still exceeding the central bank's goal of 2.0%.

"The committee was concerned with the possibility that if the policy rate is lowered prematurely, inflation could remain above target for too long," Norges Bank said. The central bank predicted that the policy rate will average 4.5% in 2024 and 4.1% in 2025, up from March forecasts of 4.4% and 3.9% for the two years, respectively, reflecting inflation fears and the currency weakness.

The rate projection for 2026 was raised to 3.4% from 3.3%, while the 2027 forecast dropped to 2.8% from 2.9%, Norges Bank's monetary policy report showed. "Policymakers at Norges Bank are more concerned than their counterparts elsewhere that lower interest rates will cause the currency to weaken, adding to price pressures," Capital Economics economist Jack Allen-Reynolds said in a research note.

The Swiss National Bank earlier on Thursday cut its policy rate by 25 basis points to 1.25%, as expected by two-thirds of analysts polled by Reuters. The U.S. Federal Reserve last week kept interest rates steady and pushed out the start of rate cuts to perhaps as late as December, while the European Central Bank, which cut rates earlier this month, is expected to slowly reduce the cost of borrowing in the euro zone.