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Norway’s central bank kept its key interest rate on hold as expected in its March meeting, and said it expects to keep the deposit rate at 0.5 per cent for longer than previously forecast, even while recognising that “persistently low interest rates may lead to financial system vulnerabilities”.

Norges Bank has maintained the highest key rate of any major European central bank, but cooling inflation in recent months had prompted warnings that it could cut rates. The bank said today it expects inflation to fall faster than its previous forecasts, which would usually suggest a lower interest rate “in the period ahead”, but said “there are prospects that inflation will pick up again further out” as growth improves.

Øystein Olsen, Norges Bank governor, said:

Monetary policy is expansionary and supportive of structural adjustments in the Norwegian economy. The executive board’s current assessment of the outlook suggests that the key policy rate will most likely remain at today’s level in the period ahead.

The krone, which has weakened in recent weeks dipped after the decision.

Data released last week showed the annual inflation rate dropped more than expected to 2.5 per cent in February, with core inflation significantly lower at only 1.6 per cent.

Today, the central bank also noted that “the rapid rise in house prices and growing debt burdens indicate that households are becoming more vulnerable”.

Carl Hammer, head of currency strategy at SEB, says:

It is a bit surprising the central bank likes to signal they won’t touch the policy rate for 30 months when (at the same time) house prices are “on fire”.

It is not however surprising from the perspective of inflation below target… and growth barely at trend.

Joachim Bernhardsen, analyst at Nordea, said Norges Bank’s message, which projected rates 33bp lower by the end of 2019 than its December forecast, was “on the dovish side”.

Norges Bank put little weight on the recent improvement in domestic economy. The developments from December actually argue for a stronger downward revision of the rate path. However, due to financial stability the rate path is pulled up somewhat in the near term.

The full monetary policy and financial stability report is here.

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