Key Moments
- Norwegian core inflation stands at 3.0%, exceeding Norges Bank’s latest projections and well above its 2% target.
- Stronger-than-expected labor market conditions and persistent inflation are increasing the likelihood of a rate hike before summer.
- Middle East-related energy price risks and ongoing inflation pressures are seen as pushing policy in a more restrictive direction.
Inflation Overshoot Raises Policy Questions
Nordea’s Kjetil Olsen highlights that core inflation in Norway is currently at 3.0%, which is higher than Norges Bank’s forecast and distant from the central bank’s 2% objective. He underscores that unemployment is also lower than the central bank anticipated, intensifying the debate over how tight monetary policy really is and how long Norges Bank can continue to emphasize employment outcomes.
Olsen argues that these dynamics increase the odds of a policy rate increase before summer, particularly as energy prices face upside risks linked to developments in the Middle East.
Core Inflation vs Norges Bank Projections
According to Olsen, the latest core inflation reading matched both Nordea’s and market consensus expectations at 3.0%, but it exceeded Norges Bank’s projection by 0.4 percentage points. He notes that in the previous month, core inflation was 0.5 percentage points above the central bank’s estimate, indicating a consistent pattern of higher-than-expected inflation.
He states that inflation is clearly running above what Norges Bank had assumed, yet he judges it is “probably not high enough for them to hike in March already.”
| Indicator | Latest Value / Description | Relative to Norges Bank Projection |
|---|---|---|
| Core inflation (current reading) | 3.0% | 0.4 percentage points higher |
| Core inflation (previous month) | Not specified | 0.5 percentage points higher |
| Inflation target | 2% | Substantially above target for multiple years |
Rate Path Seen Tilting Higher
Despite his baseline view that a rate hike in March is not yet the most likely outcome, Olsen emphasizes significant uncertainty:
“But we are very uncertain and cannot rule that out. The rate path is definitely up and the probability for a rate hike somewhat later is high.”
He stresses that there has effectively been no meaningful movement toward the 2% inflation target over the last two years and points out that 2026 would represent the fifth consecutive year with inflation markedly above target.
Balancing Employment and Price Stability
The prolonged period of above-target inflation raises difficult questions for the central bank’s mandate. Olsen asks:
“For how long can Norges Bank “afford” to put a lot of weight on the employment side of their mandate?”
He argues that at some stage the central bank must reassess its monetary stance and consider whether it should place greater emphasis on reducing inflation than it has done so far:
“At some point, Norges Bank has to evaluate their own monetary policy and at least discuss wether they must start to put a higher weight on bringing inflation down than so far. We think they are closing in on that point and cannot at all rule out that that they will put action to the words of the governor in her annual speech in February: “We will ensure that inflation is brought back to 2 percent.””
War and Energy Prices Add to Upside Risks
Olsen also addresses the impact of the conflict in the Middle East on Norway’s inflation outlook. He notes that the war is likely to exert upward pressure on inflation through higher energy prices, while the drag on overall growth is expected to be limited:
“On the margin therefore, the war will pull inflation higher but the overall negative growth effect will be small. The war therefore also pulls in the direction of higher rates, all else equal.”
This combination of persistent domestic inflation, a tighter-than-expected labor market, and geopolitical energy risks underpins Nordea’s assessment that the risk of a rate hike by Norges Bank remains alive and has increased looking ahead to the period before summer.
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