Norges Bank raises policy rate to 4.25 percent

Governor Ida Wolden Bache reported on Norges Bank's decision to increase the policy rate, noting that inflation remains above the 2 percent target.

While rapid disinflation occurred from its 2023 peak, inflation has largely stabilized around 3 percent (excluding energy) since autumn 2024.

Unlike some neighboring countries, Norway's inflation is now primarily driven by domestically produced goods and services, fueled by significant wage increases in recent years.

These wage hikes, particularly in manufacturing, have provided room for broader increases across less profitable sectors, which then pass on higher labor costs to consumer prices.

Norges Bank previously kept rates unchanged through 2024 and began a cautious easing in summer 2025, but the economic outlook shifted, necessitating the recent hike.

Bache addressed the dilemma of reacting to supply shocks, such as the recent sharp rise in oil and commodity prices following the Middle East conflict.

While Norges Bank cannot influence global energy markets, it must counteract their spillover into domestic prices and wage growth.

Higher interest rates dampen inflation by curbing household consumption and firm investment, and by strengthening the krone, which reduces imported price inflation and export sector profitability.

However, the central bank also weighs employment considerations, interpreting its mandate to keep employment as high as possible.

This balance means a lesser policy reaction to supply-side inflation drivers compared to demand-driven pressures, aiming to avoid unnecessary economic restriction.