Norges Bank (NB) raised its key rate by 25 basis points to 1.0 percent and has now raised it by a total of 50 basis points since September 2018 when the rate was raised for the first time in 7 years.
The rate hike was well-telegraphed after the central bank in December said it was likely to raise the rate today and continue to raise the rate as it unwinds its accommodative monetary policy stance.
"Our current assessment of the outlook and balance of risks suggests that the policy rate will most likely be increased further in the course of the next half-year," NB Governor Oeystein Olsen said in a statement.
In an update to its quarterly monetary policy report, the central bank raised its forecast for the policy rate over the next few years from its December report but lowered it slightly further out, with the upward shift reflecting stronger domestic demand and a weaker exchange rate of the krone.
The downward revision of the rate path reflects the prospects for lower growth and a more gradual rate rise among Norway's trading partners, changes illustrated by the recent dovish shifts by major central banks, such as the U.S. Federal Reserve, the European Central Bank and the Bank of Canada.
NB's policy rate is now seen averaging 1.1 percent this year, up from December's forecast of 1.0 percent, and 1.6 percent in 2020, up from 1.4 percent previously forecast.
But for 2021 the rate is forecast to average 1.7 percent, down from 1.8 percent, and then remaining at that level in 2022.
"The uncertainty surrounding global developments and the effects of monetary policy suggest a cautious approach to interest rate setting," Olsen said.
While the global economy has slowed in recent months, Norway's oil-fueled economy has been expanding at a solid pace since 2016, with capacity utilization now slightly above normal.
In the fourth quarter of last year, Norway's economy expanded by an annual 1.7 percent and NB's regional March survey this showed firms expect growth to remain firm over the next 6 months on higher oil investment, digitalization and high public investment.
Illustrating the upward pressure on inflation from the strong economy, the survey showed rising capacity utilization and employment, with annual wage growth estimated of 3.0 percent.
NB raised its forecast for economic growth in the mainland, which excludes the oil shelf in the North Atlantic, to 2.7 percent this year from a previous 2.3 percent and 2018's 2.5 percent, supported by steady increases in both household consumption and business investment.
Investments in petroleum extraction and pipelines is especially strong this year, seen up 12.5 percent from last year, an upward revision by 2.0 percent.
Further out, these oil-related investments are seen declining and lower growth abroad will weigh on Norway's economy.
For 2020 NB sees overall economic growth in Norway of 1.8 percent, up from 1.6 percent, but then 1.2 percent in 2021, down from 1.4 percent, and 1.5 percent in 2022.
Headline inflation in Norway has topped the central bank's 2.0 percent target since February 2018 and was steady at 3.5 percent for the second consecutive month in February. Core inflation jumped in February to 2.6 percent from 2.1 percent in the previous two months.
A weaker than expected krone in 2018 has also put upward pressure on inflation.
But over the last week the krone has reversed course and it received another boost following the Federal Reserve's forecast on Wednesday that it would keep the fed funds rate on hold this year and stop shrinking its balance sheet by October.
The krone was trading at 8.44 per U.S. dollar today, up 3.2 percent this year.
"Norges Bank's Executive Board has decided to raise the policy rate by 0.25 percentage point to 1.0 percent.
The Norwegian economy is expanding at a solid pace, and capacity utilisation now appears to be slightly above a normal level. Underlying inflation is a little higher than the inflation target. The uncertainty surrounding global developments and the effects of monetary policy suggests a cautious approach to interest rate setting. Overall, the outlook and the balance of risks imply a gradual interest rate increase ahead.
The upturn in the Norwegian economy appears to be stronger than anticipated earlier. On the other hand, there are prospects for weaker growth and lower interest rates abroad. The policy rate forecast indicates a slightly faster rate rise in 2019 and a somewhat lower policy rate further out than projected in the previous Report. With this path for the policy rate, inflation is projected to be close to target in the years ahead, at the same time as unemployment remains low. The policy rate path will be adjusted in response to changes in economic prospects.
"Our current assessment of the outlook and balance of risks suggests that the policy rate will most likely be increased further in the course of the next half-year", says Governor Øystein Olsen."
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