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Norway Monetary Policy March 2018

Norway: Norges Bank keeps policy rate unchanged at 0.50% in March; signals a hike after the summer

At its 15 March meeting, Norges Bank’s Executive Board kept the key policy rate unchanged at its all-time low of 0.50%, where it has been since March 2016. The decision—which was in line with market expectations and is a continuation of long-running expansionary monetary policy—came despite rising inflationary pressures and as the economy benefits from higher oil and natural gas prices.

Inflationary pressures have increased in Norway since last August, and economic growth accelerated to 1.8% in 2017 from 1.1% in 2016. Low interest rates, expansionary fiscal policy and higher hydrocarbon prices have contributed to this improved economic performance. Despite this, the Bank felt it was still premature to raise rates, as core inflation remains fairly muted. Although Norges Bank did not increase the key policy rate at its March meeting, the government did reduce its medium-term inflation target from 2.5% to 2.0% on 2 March. The Bank noted that no significant changes in monetary policy should be expected as a result of this, as it will continue to emphasize factors such as output and employment in addition to inflation when making decisions.

Taking a forward-looking view, Norges Bank signaled that a hike in the key policy rate is most likely to come after the summer this year. With high household debt levels in Norway, though, any hike will likely be gradual to avoid heavily increasing interest-payment pressure on households. The Bank noted that the economy is on an upward trend and that the negative output gap—the difference between mainland GDP (which excludes petroleum activities and related ocean transport) and projected potential mainland GDP—will likely narrow this year before turning positive next year.

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