Policy rate held at 4.25 percent despite lower summer inflation
Norges Bank's Monetary Policy and Financial Stability Committee kept the policy rate unchanged at 4.25 percent at its August 12 meeting. Governor Ida Wolden Bache noted that while inflation has slowed faster than projected, a restrictive monetary policy stance remains necessary.
Slower price growth offers no guarantees
CPI inflation fell to 3.0 percent in July, while core inflation (CPI-ATE) reached 2.7 percent, coming in below projections made earlier this summer.
Despite these lower figures, Governor Ida Wolden Bache stressed that it is too early to judge if the broader inflation outlook has fundamentally shifted.
Capacity utilisation in the Norwegian economy is drifting down toward normal levels, though unemployment remains largely unchanged.
Meanwhile, secondary housing market prices dropped markedly in July, and construction activity stays subdued.
The Committee warned that a rapid increase in business costs over recent years will continue to exert upward pressure on consumer prices ahead.
The threat of entrenched expectations
The central bank maintains that monetary policy must stay restrictive to bring inflation back to its target within a reasonable horizon.
Officials fear that prolonged elevated inflation could cause households and firms to adjust their long-term expectations, making price stability far harder to restore.
External factors present a mixed picture: Middle East tensions create ongoing uncertainty, and gas prices have risen, though the krone has stabilized following earlier summer weakness.
Strict posture, fragile progress
Norges Bank rightly plays for time by delaying fresh forecasts until September rather than overreacting to one soft inflation reading.
Yet maintaining a hike threat while housing contracts risks squeezing a cooling economy too hard.
This rigid stance leaves the central bank walking a precarious tightrope.
Source: Policy rate kept unchanged at 4.25 percent
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