The upswing in the Norwegian economy has continued. Unemployment has fallen further, and capacity utilisation is estimated to be above a normal level. In recent weeks, the number of new cases and Covid-related hospitalisations have reached a new peak since the onset of the pandemic. Increased infection rates and extensive containment measures are expected to dampen activity in the near term. When infection rates subside further out and containment measures are eased, the economic upswing will likely continue. Higher electricity prices have resulted in elevated CPI inflation, but underlying inflation is lower than the inflation target. Rising wage growth and higher imported goods inflation is expected to push up underlying inflation ahead.

Monetary policy is expansionary. In the Committee’s assessment, the objective of stabilising inflation around the target somewhat further out suggests that the policy rate should be raised towards a more normal level. A gradual normalisation of the policy rate is consistent with continued high employment. Higher interest rates will also help to counter a build-up of financial imbalances.

In its discussion of the balance of risks, the Committee was concerned with the potential economic effects of the pandemic and containment measures in the period ahead. If there is a need for more stringent and protracted containment measures that pull down economic activity through spring next year, further rate hikes may be postponed. The Committee was also concerned with a potentially higher-than-projected rise in domestic wages and prices due to capacity constraints and persistent global price pressures. If there are prospects of persistently high inflation, the policy rate may be raised more quickly.

“There is considerable uncertainty about the evolution of the pandemic and its effects on the economy. But if economic developments evolve broadly in line with the projections, the policy rate will most likely be raised in March”, says Governor Øystein Olsen.

The policy rate forecast is little changed from the September 2021 Monetary Policy Report and indicates a gradual rise in the policy rate in the coming years.