At its last meeting in January, Norges Bank’s Monetary Policy Committee kept the policy rate unchanged at 4.5% but reiterated the guidance that “the policy rate will likely be reduced in March”. Since then, spot activity data remained subdued, but the labour market showed signs of resilience and business expectations turned more positive.
At the same time, after inflation surprised notably to the upside, we now see stronger core inflation in 2025, with the medium-term inflation outlook still pointing to inflation decelerating towards target. With policy clearly restrictive, strong guidance for a cut in March and Norges Bank’s record of following its guidance closely, and inflation and wage expectations appearing benign, we maintain our call for a 25bp cut at this week’s meeting.
At the same time, we expect guidance during the meeting to lean hawkish and the March Monetary Policy Report (MPR) to include a notable upgrade to the core inflation path. While stronger-than-expected wage growth could support an acceleration in services inflation, we expect the Q1 spike in food prices to be short-lived and imported goods disinflation to be further supported by stronger-than-expected krone.
We thus see Norges Bank downplaying some of the upside inflation surprise. But we expect them to signal caution and upgrade their policy rate path to reflect firmer inflation and wage growth, only partially offset by stronger FX, lower oil prices and tighter financial conditions. We revise our baseline and now expect Norges Bank to deliver only 3 cuts this year (vs 4 before), arriving at a higher terminal of 3% (vs. 2.75% before) in 2026Q3.
At its last meeting in January, Norges Bank’s Monetary Policy Committee kept the policy rate on hold at 4.5% but reiterated the guidance that “the policy rate will likely be reduced in March”. Since then, data have been mixed, but on balance, have pointed to a more hawkish direction, making the March meeting this week and the path ahead more uncertain. In this Daily, we take stock of recent data in Norway and stick with our call for a March cut, but revise our policy rate path farther ahead to reflect firmer inflation, potentially stronger wage growth, and a resilient labour market.
Since the January meeting, Q4 Mainland GDP growth surprised notably to the downside, printing at -0.4%qoq, bringing the 2024 annual average growth to 0.6%, below our and Norges Bank’s (0.9%) expectations. Despite a slight upside revision, Norges Bank still projects that the output gap will turn negative in 2025, and that growth will remain below potential thereafter, which could be further exacerbated by oil price dynamics going forward (Exhibit 1).
Despite subdued growth numbers, the labour market remains resilient, with the LFS 3-month centred moving average of the unemployment rate moving lower in December and registered unemployment, a focus for Norges Bank, down to 2.0% as of February. Regional Network Survey (RNS) output expectations also turned more positive, driven by “increased defence investment” and “stronger competitiveness of Norwegian firms”.
At the same time, inflation has been surprising to the upside vs. Norges Bank’s projections. The February core inflation print (CPI-ATE) came in 0.7pp ahead of expectations, with the majority of the beat driven by unexpectedly strong consumer goods (particularly, food) and services ex rent prices (Exhibit 2, left). We thus update our component-level inflation models, with a bottom-up aggregate across five CPI-ATE components pointing to an acceleration ahead and a stronger than we expected core inflation in 2025.
Looking back, however, even after a hawkish shift in the policy language in June 2024, the policy rate paths were showing a high probability of a cut in March, even though inflation was expected to not come down as quickly as in the most recent MPR.
Taken together, most recent data point to a more hawkish direction, with improving growth expectations coupled with higher inflation on the forecast horizon pushing the policy rate path higher. But spot activity remains weak, and the medium-term inflation outlook still points to inflation decelerating towards target, with inflation and wage expectations appearing benign. With policy clearly restrictive, strong guidance for a cut in March and Norges Bank’s record of following its guidance closely, we maintain our call for a 25bp cut at this week’s meeting.
At the same time, we expect the guidance during the meeting to lean hawkish and the March Monetary Policy Report (MPR) to include a notable upgrade to the core inflation path. The degree of the upward revision would, however, depend on Norges Bank’s assessment on the persistence of upside price pressures. We thus take a closer look at the main drivers of the key core components. While food inflation shot up to 7.5%yoy in February, and our thick modelling approach predicts a notable acceleration in the agricultural consumer goods component in 2025Q1, we expect the spike to be short-lived (Exhibit 3, left). As uncertainty remains high, we cross-check our approach with a simple mapping against the producer price indices in the food industry, which tend to lead food prices by around 5 months and point to a deceleration ahead (Exhibit 3, right).
Besides, we expect imported goods disinflation to be further supported by stronger-than-expected krone, which has been notably stronger than what Norges Bank expected (Exhibit 4, left). As we’ve shown in the past, the outlook for this category hinges on the projected behaviour of the currency, especially in recent quarters (Exhibit 4, right). Taking Norges Bank’s current conservative forecast, despite NOK still having scope to outperform in the more medium term, we see imported goods inflation averaging 1.4%yoy in 2025Q4.
However, services inflation strength could prove more persistent, with annual wage growth for 2024 preliminary reported at 5.7%, above Norges Bank’s expectations of 5.2%. Looking ahead, our wage Phillips curves are also pointing to somewhat stronger numbers for 2025 and 2026, despite a notable tick down in 2025 wage growth expectations to 4.4% in the most recent RNS (Exhibit 5, left). At the same time, we’ve shown that 1-year-ahead inflation expectations screen as the most important driver of the services ex. rent inflation component, and they have been on a steady declining trajectory, with the 2025Q1 print showing the lowest reading since 2021.2 Besides, the uptick in the component seems to be driven by non-labour-intensive services, like transport and communications, which are often driven by idiosyncratic factors, or non-core prices, like energy (Exhibit 5, right).
We thus expect Norges Bank to downplay some of the upside inflation surprise. That said, we expect them to signal caution and upgrade their policy rate path to reflect firmer inflation and wage growth, only partially offset by stronger FX, lower oil prices and tighter financial conditions. Following the inflation upgrade, we also revise our baseline and now expect Norges Bank to deliver 3 cuts this year (vs 4 before), arriving at a higher terminal of 3% (vs. 2.75% before) in 2026Q3, contingent inflation doesn’t prove to be stickier. We now see the risks around our baseline forecast as balanced, with the probability of a slower cuts scenario (of 2 cuts per year) and a higher terminal at 30% and a faster and deeper cuts scenarios at 20%. Our baseline and probability-weighted forecasts remain meaningfully below the market pricing.
