Norges Bank, which has cut its rate by 50 basis points this year, added that "uncertainty as to the effects of the monetary policy stance suggests a cautious approach to interest rate setting" and "a lower policy rate may increase the risk of a more rapid rise in real estate prices and debt."
Norway's krone has been depreciating in line with the fall in crude oil prices, fueling inflation, while expansionary fiscal policy is helping support demand that has been hit from the fall in oil prices and lower oil-related investments.
In its latest monetary policy report, Norges Bank saw growth this year of 1.4 percent, up from the September forecast of 1.25 percent, declining to 1.1 percent in 2016, down from 1.25 percent previously previous forecast. For 2017 growth of 1.9 percent, down from 2.0 percent.
The forecast for the policy rate in 2016 was unchanged at 0.5 percent from September's forecast, and for 2017 the policy rate was seen at 0.4 percent, down from 0.5 percent. For 2018 it was seen rising to 0.7 percent compared with 0.75 percent previously forecast.
Inflation this year was forecast to average 2.2 percent, largely unchanged from the September forecast, and in 2016 inflation was seen at 2.8 percent, similar to 2.75 percent previously forecast. For 2017 inflation was seen at 2.5 percent, slightly up from 2.25 percent forecast in September.
The crown was trading at 8.7 to the U.S. dollar today, down 14 percent this year, while inflation picked up speed to a year-high of 2.8 percent in November from 2.5 percent in October. Gross Domestic Product in the third quarter rose by an annual 3.0 percent, up from 2.3 percent in the second quarter.
Separately, the central bank said the finance ministry had followed its advice to keep the countercyclical buffer for banks unchanged at 1.5 percent. Although household debt ratios have been rising, the central bank said house price inflation and debt had edged down and banks had announced that their credit standards would be tightened somewhat.
Norges Bank issued the following statement:
"Norges Bank's Executive Board has decided to keep the key policy rate unchanged at 0.75 percent.
The effects of the fall in oil prices and the decline in oil investment on the Norwegian economy are gradually becoming evident. Going forward, household consumption and private sector investment are expected to be lower than previously projected. On the other hand, an expansionary fiscal policy will support demand for goods and services. Overall, there are prospects that growth ahead will be somewhat weaker than anticipated. Unemployment is expected to rise slightly more than projected in the September Monetary Policy Report.
Monetary policy is expansionary and is supporting the restructuring of the Norwegian economy. The krone has depreciated and inflation has picked up. A lower key policy rate may increase the risk of a more rapid rise in real estate prices and debt. Uncertainty as to the effects of the monetary policy stance suggests a cautious approach to interest rate setting.
"An overall assessment of the outlook and balance of risks led the Executive Board to conclude that the key policy rate should be kept unchanged at this meeting. If economic developments are broadly in line with projections, the key policy rate may be reduced in the first half of 2016", says Governor Øystein Olsen."
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