COPENHAGEN (Reuters) – Norway’s latest inflation data has cast serious doubts over the country’s anticipated interest rate cuts in March. Core inflation surged past expectations in February, suggesting that Norges Bank may need to reassess its monetary policy stance to prevent inflation from spiraling further.
According to fresh data from Statistics Norway (SSB), core inflation, which excludes volatile energy prices and tax changes, climbed to 3.4% year-on-year in February, a significant rise from 2.8% in January and well above the 2.9% median forecast in a Reuters poll. Even more concerning, the central bank had projected an even lower figure of 2.7%, indicating a more persistent inflationary pressure than initially expected.
A Tougher Inflation Challenge for Norges Bank
Handelsbanken, a leading financial institution, highlighted the challenge facing Norges Bank, noting that price growth for both imported and domestic goods and services had exceeded forecasts. This suggests that inflation is proving more stubborn than the central bank’s policymakers had anticipated, raising the possibility that interest rates may have to remain higher for longer.
Following the data release, the Norwegian krone (NOK) strengthened slightly to 11.73 against the euro, up from 11.75 earlier in the day, reflecting market reactions to the unexpected inflation figures.
Rate Cut Expectations Now in Doubt
In January, Norges Bank kept its benchmark interest rate steady at 4.50%, the highest level in 17 years, while maintaining its guidance for the first rate cut in March—a move that would mark the first reduction in borrowing costs in five years. The central bank’s long-term projections had pointed to three rate cuts throughout 2024, aiming to bring the key policy rate down to 3.75% by the end of 2025.
However, given the latest inflation trends, Handelsbanken warned that while Norges Bank may not completely abandon its plan to cut rates in March, the bank is now likely to revise its future rate trajectory upwards.
Nordea Markets took a more hawkish stance, arguing that Norges Bank may not cut rates at all this year. The firm issued a blunt statement, saying, “The March cut is definitely off the table.”
Implications for Markets and Investors
With headline inflation (which includes energy prices and tax changes) jumping to 3.6% in February from 2.3% in January, well above the 2.9% forecast, the argument for maintaining higher interest rates has strengthened. Investors and businesses betting on a softer monetary policy may now need to reassess their positions, as a prolonged period of elevated borrowing costs could slow down economic activity and impact stock market performance.
Norges Bank is scheduled to make its next interest rate decision on March 27, a pivotal moment that will shape market expectations for the rest of the year.
For investors, this development presents both risks and opportunities. Those who had anticipated a rate cut might need to adjust their portfolio strategies. Meanwhile, fixed-income investors and those holding Norwegian krone positions could benefit from a stronger currency and higher yields for a longer period.