Nomura's research analysts report that the central bank of Norway, Norges Bank unexpectedly raised its policy rate by 25bp to 4.25% in May, citing frustration with sticky underlying inflation and a need to preserve credibility after earlier guidance. Nomura now expects no further rate hikes in 2026 and projects the next cut in September 2027, conditional on inflation slowing and NOK developments.

Norges Bank front-loads tightening on inflation

"Norges Bank raised its policy rate by 25bp to 4.25% at its May meeting, against our and consensus expectations. However, we had noted that the decision was a very close call and there was a high risk of a hike. Five of the 17 economists polled by Bloomberg expected a hike, and market pricing had suggested around a 50% probability of a 25bp hike (+13bp) going into the meeting."

"Norges Bank did not update its forecasts today but assessed that the monetary policy outlook does not appear to have changed materially since the March forecasts. Guidance highlighted that a further rise in the policy rate may occur this year, with Governor Ida Wolden Bache highlighting “the policy rate forecast presented in March implied the potential need for further tightening of monetary policy later this year.”"

"We believe the main reason Norges Bank raised its policy rate was that it lost patience with sticky underlying inflation. The governor noted in the press release that “inflation is too high and has run above target for several years”. Of course, price pressures from the Iran war add to the reasoning for a rate hike, but the governor also highlighted at the press conference that the rate rise is “not only due to war impacts” and that “wages have also increased markedly in recent years”, which have likely contributed to sticky underlying inflation."

"After today’s move, we expect no further change in the policy rate this year and continue to expect a September 2027 cut, as we forecast a slowdown in inflation to closer to 2.0% by then. This rate cut could occur earlier, especially if a stronger NOK adds to disinflation."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)