In a surprising move on Thursday, Norway’s central bank, Norges Bank, lowered its key policy interest rate by 25 basis points to 4.25%. This is the first rate cut since 2020 and marks a significant shift in the country’s monetary policy.
The decision caught most economists and market watchers off guard, causing the Norwegian krone to weaken against the euro shortly after the announcement.
Norges Bank stated that the economic outlook remains uncertain, but if the economy develops broadly as projected, the policy rate will be reduced further during 2025. The central bank’s governor, Ida Wolden Bache, explained that inflation in Norway has eased since the last monetary policy meeting in March.
Core inflation, which excludes volatile items like food and energy, slowed to 2.8% year-on-year in May, down from previous months but still above the bank’s 2.0% inflation target.
“The inflation outlook for the coming year indicates lower inflation than previously expected,” Bache said. “A cautious normalization of the policy rate will help bring inflation back to target without unnecessarily restricting economic growth.”
Before this decision, Norges Bank had kept rates steady at 4.50% last month, which was the highest level since 2008. The bank had postponed a planned rate cut in March after consumer prices unexpectedly rose.
Most economists surveyed by Reuters between June 11 and 16 expected the bank to maintain the current rate. Out of 26 economists, 23 predicted no change, while only three anticipated a rate cut.
The rate cut comes as Norway prepares for a parliamentary election in September. Recent polls suggest that the minority Labour government, led by Prime Minister Jonas Gahr Støre, may be re-elected. Støre publicly welcomed the rate cut, calling it “heartening news” and especially beneficial for people with loans.
Norway’s decision to cut rates contrasts with the approach of some other Western central banks. Many began easing monetary policy last year as inflation slowed and economic growth weakened. For example, Sweden’s central bank reduced its policy rate by 25 basis points to 2.0% on Wednesday, citing a weakening economy.
Meanwhile, the U.S. Federal Reserve held rates steady but indicated that further cuts could be possible later this year. The Bank of England was also expected to keep rates unchanged on Thursday.
The Norwegian krone fell to 11.55 against the euro shortly after the announcement, down from 11.48 just before the rate cut was announced. This reflects market reaction to the unexpected easing and expectations of further rate reductions.
Overall, Norges Bank’s surprise rate cut signals a shift toward a more accommodative monetary policy stance in Norway. The central bank aims to balance reducing inflation with supporting economic growth, especially as global uncertainties persist.
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