Norway’s central bank adopted a cautious approach to policy tightening and hinted that the key interest rate would be hiked further in the first quarter of next year, after raising rates for the first time since 2011, on Thursday.
The Executive Board decided to raise the key policy rate by a quarter-point to 0.75 percent, the Norges Bank said in a statement. The decision was in line with economists’ expectations.
“The Executive Board’s current assessment of the outlook and balance of risks suggests that the key policy rate will most likely be increased further in 2019 Q1”, Norges Bank Governor Oystein Olsen said.
The previous change in the rate was a quarter-point reduction in March 2016.
In June last year, the bank shed its downward bias for its interest rate path and predicted in May this year that the rate will be hiked after summer.
The outlook and the balance of risks imply a gradual interest rate increase in the years ahead, the Norges Bank said.
If the key policy rate is kept at the current level for too long, price and wage inflation may accelerate and financial imbalances build up further, the bank added.
The bank expressed worry that this would increase the risk of a sharp economic downturn.
“Uncertainty surrounding the effects of higher interest rates suggests a cautious approach to interest rate setting,” the bank said.
Inflation is projected to remain close to the target for some years and unemployment is seen to remain low.
ING Bank economist Jonas Goltermann predicted two policy rate hikes in 2019, starting March.
The high level of debt among Norwegian households could be preventing the bank from adopting an aggressive stance, the economist said.
That said, once the uncertainty regarding higher rates clear and concerns over the US-China trade war fades, the bank may be open to a more aggressive stance, Goltermann said.
Further, if the krone does not strengthen as much as expected, then that may also support the case for tighter policy, he added.
The next policy decision is scheduled to be announced on October 25.