Expected policy rates for Norway's trading partners have increased since September. Oil prices have risen and are now somewhat higher than expected, while the krone has appreciated more than anticipated. There are prospects that inflation will be lower than projected and that activity in the Norwegian economy is picking up at a somewhat slower pace than projected in September.

Changes in the outlook for inflation and capacity utilisation imply, in isolation, a somewhat lower key policy rate in the coming years. On the other hand, the rapid rise in house prices and household debt has increased the risk of a sharp fall in demand further out. A lower key policy rate increases the risk of a further acceleration in house price inflation and debt accumulation. The risk of a build-up of financial imbalances and the uncertainty surrounding the effects of a lower key policy rate now suggest a cautious approach to interest rate setting.

"Our current assessment of the outlook suggests that the key policy rate will most likely remain at today's level in the period ahead," says Governor Øystein Olsen.

The analyses in this Report suggest that the key policy rate will remain close to ½% in the coming years. At the same time, the key policy rate forecast implies a slightly higher probability of a decrease than an increase in the key policy rate in the year ahead.

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