The Covid-19 pandemic has led to a sharp downturn in the Norwegian economy. Activity has picked up through summer, and unemployment has moved lower. The increase in infection rates may put a brake on the upswing in the coming period. It will take time for output and employment to return to pre-pandemic levels. Underlying inflation is above the target, but the krone appreciation since March and prospects for low wage growth suggest that it will moderate.

Low interest rates contribute to speeding up the return to more normal output and employment levels. This reduces the risk of unemployment becoming entrenched at a high level. On the other hand, a long period of low interest rates could increase the risk of a build-up of financial imbalances.

“The sharp economic downturn and considerable uncertainty surrounding the outlook suggest keeping the policy rate on hold until there are clear signs that economic conditions are normalising”, says Governor Øystein Olsen.

The policy rate forecast is little changed since June 2020 Monetary Policy Report and implies a rate at the current level over the next couple of years, followed by a gradual rise as activity approaches a more normal level.