Norges Bank (NB), which cut its rate by 25 basis points in March, said oil prices had risen and are now somewhat higher than expected while the exchange rate of the krone had also appreciated more than anticipated.
"There are prospects that inflation will be lower than projected and that activity in the Norwegian economy is picking up at a somewhat slower pace than projected in September," NB said.
On its own, a lower outlook for inflation and capacity utilization imply a lower policy rate but lower rates raise the risk that households accumulate further debt and push up home prices even more, increasing the risk of a sharp fall in demand in the future.
"The risk of a build-up of financial imbalances and the uncertainty surrounding the effects of a lower key policy rate now suggest a cautious approach to interest rate setting," NB said.
In September the central bank raised its forecast for the key policy rate to average 0.6 percent this year, up from 0.5 percent, and the 2017 forecast to 0.4 percent from 0.3 percent. For 2018 the central bank also forecasts a key policy rate of 0.4 percent, rising to 0.7 percent in 2019.
In November Norway's inflation rate eased to 3.5 percent from 3.7 percent in October - but above NB's 2.5 percent target - while Gross Domestic Product contracted by an annual rate of 0.9 percent in the third quarter from growth of 2.5 percent in the second quarter.
In September NB raised its inflation forecast for 2016 to 3.6 percent from 3.3 percent forecast in June, the 2017 forecast to 2.6 percent from 2.2 percent, the 2018 forecast to 2.1 percent from 1.9 percent and the 2019 forecast to 1.8 percent from 1.7 percent.NB has forecast economic growth this year of 0.9 percent and 1.8 percent in 2017. For 2018 and 2019 GDP is seen rising 2.1 percent.
After falling sharply in 2014 and 2015 on lower oil prices, the krone has been more stable this year and was trading at 8.65 to the U.S. dollar today, up 2.2 percent this year.
Norges Bank issued the following statement:
"Expected policy rates for Norway's trading partners have increased since September. Oil prices have risen and are now somewhat higher than expected, while the krone has appreciated more than anticipated. There are prospects that inflation will be lower than projected and that activity in the Norwegian economy is picking up at a somewhat slower pace than projected in September.
Changes in the outlook for inflation and capacity utilisation imply, in isolation, a somewhat lower key policy rate in the coming years. On the other hand, the rapid rise in house prices and household debt has increased the risk of a sharp fall in demand further out. A lower key policy rate increases the risk of a further acceleration in house price inflation and debt accumulation. The risk of a build-up of financial imbalances and the uncertainty surrounding the effects of a lower key policy rate now suggest a cautious approach to interest rate setting.
"Our current assessment of the outlook suggests that the key policy rate will most likely remain at today's level in the period ahead," says Governor Øystein Olsen.
The analyses in this Report suggest that the key policy rate will remain close to ½% in the coming years. At the same time, the key policy rate forecast implies a slightly higher probability of a decrease than an increase in the key policy rate in the year ahead."
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