Norway’s central bank unexpectedly lowered its key policy rate by 25 basis points to 4.25% on Thursday. The move was driven by a more favorable inflation outlook and signals further rate cuts could follow.
In an official statement, the central bank said, “The economic outlook is uncertain, but if the economy develops as currently forecast, the policy rate will be lowered further in 2025.”
Central bank governor Ida Wolden Bache added at a news conference that the policy rate could be reduced one or two more times before year-end, potentially bringing borrowing costs down to 4.0% or 3.75%. She also noted that interest rates are expected to hover around 3% by the end of 2028.
This marks the first rate cut since 2020, surprising most analysts who had predicted the rate would stay at 4.50%, the level last held in May. A Reuters poll showed 23 out of 26 economists expected the rate to remain unchanged.
Norwegian Krone Weakens Then Recovers
Following the announcement, the Norwegian krone initially weakened against the euro, falling to 11.56 from 11.48 per euro before the 08:00 GMT release. However, it partially recovered to 11.50 by 08:58 GMT.
Inflation Trends Support Rate Decision
Governor Bache emphasized that inflation has eased since the March monetary meeting. “The outlook for inflation over the coming year suggests lower inflation than previously expected,” she said. She added that a cautious policy normalization will help bring inflation back to the 2.0% target without unduly hurting the economy.
Norway’s core inflation rate slowed more than expected in May, dropping to 2.8% year-on-year but remaining above the central bank’s target.
Political and Economic Context
The rate cut comes ahead of Norway’s parliamentary elections in September. Prime Minister Jonas Gaal Stoll publicly welcomed the move, calling it “good news for everyone with a loan,” in a rare statement.
Norway’s approach contrasts with other Western central banks. While most started easing rates last year due to slowing growth and weaker inflation, Norway maintained a higher rate for longer, delaying cuts until now.
Other Central Banks Move Differently
On the same day, the Swiss National Bank cut its policy rate to zero amid negative inflation and global uncertainty. Sweden reduced its rate by 25 basis points to 2.0%, citing economic weakness. The U.S. Federal Reserve kept rates unchanged but indicated possible future cuts.
The Bank of England is expected to maintain its interest rate later Thursday.
Expert Cautions
Oystein Dollum, chief economist at the Confederation of Norwegian Enterprise, cautioned that the central bank remains watchful. “If wage and price growth remain above expectations, rate cuts will be reduced,” he said.
