The Covid-19 pandemic has led to a sharp downturn in the Norwegian economy. Activity has picked up since spring, but higher infection rates and stricter containment measures are now holding back the recovery. At the same time, there is positive news about vaccines, and there are prospects that vaccination can begin in the very near future. This may result in a faster pick-up in economic activity than previously projected. Nevertheless, it will probably take time for output and employment to return to pre-pandemic levels. Underlying inflation has declined somewhat, but is still above the target. The krone appreciation since March and prospects for low wage growth suggest that it will moderate further ahead.

Low interest rates are contributing 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, house prices have risen markedly since spring. A long period of low interest rates increases 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 implies a rate at the current level for over a year ahead, followed by a gradual rise from the first half of 2022 as activity approaches a normal level. The forecast implies a somewhat faster rate rise than projected in the September 2020 Monetary Policy Report.