Sweden, Norway inflation divergence: Riksbank, Norges Bank trade-offs
After the post-pandemic inflation surge, Sweden and Norway have seen diverging inflation rates and monetary policy approaches. An Economic Commentary from the Riksbank explores why Norges Bank appears to have placed greater emphasis on stabilising the real economy compared to the Riksbank.
Diverging paths for inflation and policy
Following the 2022-2023 inflation surge, Sweden and Norway's inflation rates diverged markedly.
Norwegian inflation remained above target, while Swedish inflation fell below target in early 2026.
This occurred despite Norges Bank's policy rate staying above 4 percent since mid-2023, contrasting with the Riksbank's 2.25 percentage point cuts.
A higher nominal policy rate in Norway, however, does not necessarily imply tighter monetary policy.
The stronger performance of Norway's real economy, with a positive GDP gap in 2024 versus Sweden's negative gap since 2023, suggests less restrictive monetary policy.
This disparity points to a potentially higher neutral interest rate in Norway, estimated by Norges Bank at 2.25-3.5 percent, compared to the Riksbank's 1.5-3.0 percent for Sweden.
Elevated long-term inflation expectations and unit labour costs in Norway further indicate greater underlying inflationary pressures, contributing to lower real interest rates for a given nominal rate.
Weighing stability and growth
Both Norges Bank and the Riksbank balance price stability with balanced economic development, often facing a trade-off.
Norway's higher inflation and stronger resource utilisation suggest Norges Bank prioritizes real economy stabilization more.
To quantify this, the commentary calculates an implicit weight, lambda (λ), from the central banks' inflation and real economic forecasts.
Lambda reflects the relative importance given to real economic stabilization versus price stability, accounting for monetary policy effects.
Since mid-2022, Norges Bank's lambda has been consistently higher than the Riksbank's, indicating a greater emphasis on real economic stabilization.
This analysis, based on simplifying assumptions, highlights differing policy choices.
Challenging the cost of disinflation
The commentary investigates if bringing down inflation is more costly in Norway due to a flatter Phillips curve.
However, macroeconomic models for both central banks indicate the opposite: the cost of fighting inflation in terms of GDP is lower in Norway.
This directly challenges the idea that Norges Bank's greater real economy emphasis is driven by higher disinflation costs, providing a critical perspective on their policy divergence.