Policy rate raised to 4.25 percent

Norges Bank's Monetary Policy and Financial Stability Committee raised the policy rate by 25 basis points to 4.25 percent at its May 6 meeting. The decision aims to return inflation to target, which has run above target for several years.

Bache: Inflation still too high

"The Committee judged it appropriate to raise the policy rate at this meeting.

Inflation is too high and has run above target for several years," Governor Ida Wolden Bache stated.

She added that recent information on the inflation outlook supports the analyses presented in March.

External price pressures appear slightly stronger than expected in March, influenced by global commodity prices.

In Norway, twelve-month CPI inflation rose to 3.6% in March, with CPI-ATE unchanged at 3%.

Wage growth in manufacturing was set close to Norges Bank's March projection, while the krone has appreciated, dampening imported inflation.

The labour market remains broadly as expected, with capacity utilisation near normal levels.

Uncertainty persists, outlook unchanged

The Committee's March assessment indicated a likely rate hike due to unexpectedly high inflation and wage growth prospects.

Since then, the war in the Middle East continues to cause substantial uncertainty, keeping oil prices elevated.

While gas prices have fallen, other commodity prices have risen, resulting in slightly stronger external price pressures than anticipated.

Despite these global factors and a stronger krone, Norges Bank assesses that the outlook for the Norwegian economy has not materially changed since March.

The Committee judges a higher policy rate is needed to return inflation to target within a reasonable time horizon, preventing entrenched high inflation expectations.

Hike amid persistent uncertainty

The rate hike, though anticipated, reveals Norges Bank's ongoing struggle to confidently anchor inflation expectations.

Despite global uncertainties, the committee's outlook has not materially changed since March, indicating a reactive rather than proactive policy stance.

This decision underscores the persistent difficulty in assessing underlying price pressures and the uncertain path back to the inflation target.