Norges Bank (NB) raised its policy rate by another 25 basis points to 1.50 percent and has now raised it by 1 percentage point since September last year and by 0.75 points this year to contain inflation from solid domestic growth.
But weaker global growth along with lower interest rates has now led the central bank to lower its economic forecast, with a smaller rate rise seen as compared with its June monetary policy report, according to NB Governor Oeystein Olsen.
"The Executive Board's current assessment of the outlook and balance of risks suggest that the policy rate will most likely remain at this level in the coming period," Olsen said.
In June NB lowered its forecast for its policy rate to average 2.2 percent from an earlier 2.3 percent, and then decline to 1.9 percent in 2020 and 1.7 percent in 2021 and 2022.
In August, when the central bank kept its rate steady, it maintained its forecast for another rate hike this year but acknowledged that the global risk outlook now entailed greater uncertainty about policy rates going forward.
Unlike most other advanced economies, Norway's economy is still enjoying solid growth, capacity utilization is slightly above normal, and the exchange rate of the krone weaker than expected, factors that in insolation would suggest continued rate hikes.
"A higher policy rate may also mitigate the risk of a renewed acceleration in debt growth and house price inflation," Oystein said.
But low interest rates abroad and considerable uncertainty surrounding global growth prospects suggest a more cautious approach to setting interest rates, he added.
Norges Bank issued the following press release:
"Over the past year, the policy rate has been raised, and the monetary stance has become gradually less expansionary. In the Executive Board’s assessment, the overall outlook and balance of risks suggest a slightly higher policy rate. Underlying inflation is close to the inflation target. Growth in the Norwegian economy remains solid, and capacity utilisation is somewhat above a normal level. This suggests in isolation a higher policy rate. A higher policy rate may also mitigate the risk of a renewed acceleration in debt growth and house price inflation. At the same time, foreign interest rates are very low, and there is considerable uncertainty surrounding global growth prospects. This suggests a cautious approach to interest rate setting.
The policy rate forecast indicates a slightly smaller rate rise than in the June Report. Weaker growth prospects and lower interest rates abroad have contributed to the downward revision. Slightly lower inflation and a somewhat less tight domestic labour market compared with the June projections have also pulled down the rate path. A weaker-than-projected krone has in isolation pulled up the policy rate path. With a policy rate in line with the forecast, inflation is projected to remain close to the inflation target in the years ahead, at the same time as unemployment remains low. The policy rate path will be adjusted in response to a change in economic prospects or the balance of risks.
“The Executive Board’s current assessment of the outlook and balance of risks suggests that the policy rate will most likely remain at this level in the coming period,” says Governor Øystein Olsen."
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