Norges Bank (NB) had already flagged that it would raise its rate in the second half of this year but has now pinpointed this could happen on Sept. 18 when its board meets to discuss another update of its economic forecasts. The board also meets on Aug. 15.
"Monetary policy is expansionary. The outlook for the Norwegian economy suggest that it will soon be appropriate to raise the key policy rate," NB Governor Oyestein Olsen said.
In its March monetary policy report NB began preparing the ground for tighter monetary policy by raising its forecast for the policy rate this year to an average of 0.6 percent from 0.5 percent.
NB has kept its rate steady since cutting it in March 2016 as it wrapped up an easing cycle of more than four years. It has not raised its key rate since May 2011.
In today's update of the policy report, NB confirmed it still expects the rate to average 0.6 percent this year and then 1.1 percent in 2019, implying two rate hikes of 25 basis points each next year.
For 2020 the NB also forecasts two rate hikes with the rate averaging 1.6 percent, up from 1.5 percent forecast in March. In 2021 the rate is seen averaging 2.0 percent.
"Uncertainty surrounding the effects of a higher interest rate suggests a cautious approach," NB said, adding the balance of risks imply gradual rate rises in the years ahead.
But while NB sees continued expansion in Norway's economy that leads to higher wages and strong demand, it is less upbeat about the prospects for global growth that could prove to be weaker than assumed due to rising protectionism and political uncertainty.
"There is uncertainty surrounding global economic developments," NB said in its monetary policy report. While trade policy measures so far are assumed to have limited impact on growth, NB warned "increased protectionism may dampen global growth to a further extent than projected."After several years of weak growth, Norway's economy picked up speed last year and is expected to strengthen further this year on higher oil production and solid growth among its trading partners. This is pushing up capacity utilization to above normal levels and wage growth.
NB maintained its 2018 forecast for growth of Norway's mainland economy, which excludes the offshore oil and gas industry, of 2.6 percent but raised it to 2.3 percent in 2019, up from 2.0 percent, but lowered it slightly to 1.6 percent in 2020 and 1.3 percent in 2021.
Inflation has also accelerated in recent months from higher energy prices and taxes and hit 2.3 percent in May, down from 2.4 percent in April, but up from 2.2 percent in February and March.
Underlying or core inflation, which excludes energy and taxes, was only 1.2 percent in May but is still expected to rise gradually from higher wages.
NB raised its forecast for headline inflation this year to 2.3 percent from 2.1 percent but trimmed the 2019 forecast to 1.6 percent, the 2020 forecast to 1.6 percent and the 2021 forecasts to 1.9 percent.
Core inflation is seen averaging 1.3 percent this year, then 1.5 percent in 2019, 1.6 percent in 2020 and 1.9 percent in 2021.
Norway's krone has on average been slightly weaker than NB had projected in March but is still projected to appreciate in coming years due to a gradual widening of the interest rate differential against its trading partners.
The krone was trading at 8.15 to the U.S. dollar today, up 0.6 percent this year.
Norges Bank issued the following statement:
"The upturn in the Norwegian economy is continuing. Capacity utilisation appears to be close to a normal level and is likely rising faster than expected earlier. Underlying inflation is lower than the inflation target, but rising capacity utilisation implies an increase in price and wage inflation further out.
Monetary policy is expansionary. The outlook for the Norwegian economy suggests that it will soon be appropriate to raise the key policy rate. Uncertainty surrounding the effects of a higher interest rate suggests a cautious approach. As in March, the overall outlook and the balance of risks imply a gradual rate rise in the years ahead.
"The Executive Board's current assessment of the outlook and balance of risks suggests that the key policy rate will most likely be raised in September 2018", says Governor Øystein Olsen."
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