Norway's central bank lifts policy rate to 4.50%, signals more may follow

Norway's central bank raised its policy interest rate by 25 basis points to 4.50% on Thursday, a move anticipated by a narrow majority of analysts, and indicated it could tighten further to rein in inflation.

"It will likely be necessary to keep the policy rate elevated for a time, and the committee is prepared to raise the policy rate further if needed to bring inflation down to the 2% target within a reasonable time horizon," Governor Ida Wolden Bache said in a statement.

The decision followed a 25 basis-point increase in May, which came sooner than most analysts had expected. In August, the central bank said the future path of monetary policy would depend on economic developments, leaving some uncertainty over its next step.

"The committee does not want to restrict the economy more than needed, but judges that a somewhat tighter monetary policy stance is needed to return inflation to target within a reasonable time horizon," Norges Bank said.

Ahead of the announcement, 16 of 28 economists polled expected a hike to 4.50%, while 12 predicted no change. A further seven economists forecast an increase to 4.50% in the fourth quarter, and the vast majority expected that level to mark the peak borrowing cost.

The Norwegian crown strengthened to 10.76 against the euro at 0806 GMT, from 10.79 just before the announcement.

The country's core inflation rose to 3.0% year-on-year in August, below Norges Bank's official forecast of 3.3% for the period but still above its target. "Over the summer, underlying inflation moderated and was lower than expected. But the inflation outlook somewhat further ahead does not appear to have changed materially," Bache said.

Under the new policy rate path, inflation is projected to slow from next year and reach 2% in 2029. The central bank added that the economy is expected to cool further, with registered unemployment projected to edge up to slightly above pre-pandemic levels.