“In the Committee’s current assessment of the outlook and balance of risks, the policy rate will most likely be raised in September”, says Governor Øystein Olsen.

Activity in the Norwegian economy has picked up after the sharp fall in spring 2020. At the beginning of 2021, higher infection rates and tighter Covid-related restrictions held back the recovery. Through spring, the pace of vaccination has accelerated, and the authorities have begun a gradual reopening of society. Unemployment has fallen but remains high. There is still uncertainty regarding the evolution of the pandemic, but economic activity now seems to be rebounding sharply and somewhat faster than projected earlier.

Underlying inflation has slowed and is now below the 2% target. Higher global inflation and inflation expectations are creating uncertainty about inflation ahead. However, the krone appreciation since 2020 and prospects for moderate wage growth suggest that inflation in Norway will remain below target in the coming years. As long as capacity utilisation is rising, there is limited risk of inflation becoming too low.

The Committee placed weight on the contribution of low interest rates to speeding up the return to more normal output and employment levels. This reduces the risk of unemployment becoming entrenched at a high level and helps return inflation towards the target. At the same time, a long period of low interest rates increases the risk of a build-up of financial imbalances. The Committee placed weight on the marked rise in house prices since spring 2020 but noted that house price inflation has recently moderated somewhat.

In the Committee’s assessment, the overall outlook and balance of risks imply a continued expansionary monetary policy stance. Further easing of Covid-related restrictions will help a return to more normal economic conditions. This suggests that it will soon be appropriate to raise the policy rate from the current level.

The policy rate forecast is slightly higher than in the March 2021 Monetary Policy Report and implies a gradual rise from autumn 2021.