Norway's central bank said on today it expected to raise interest rates later this year to combat inflation fuelled by wage growth and rising energy prices, reversing course after it earlier flagged plans to reduce borrowing costs.
Norges Bank's monetary policy committee kept rates on hold as expected today, but said it had considered a hike already at this time and that an increase would probably be appropriate at one of the forthcoming meetings.
The policy rate forecast has been revised up since December and indicates an increase to between 4.25% and 4.5% by the end of this year from the current level of 4%, Norges Bank said.
"Uncertainty is greater than normal due to the war in the Middle East, but the committee judges that it will likely be necessary to raise the policy rate at one of the forthcoming monetary policy meetings," Governor Ida Wolden Bache said in a statement.
All 26 economists polled by Reuters had predicted no rate change and a majority also expected rates to remain on hold for the rest of this year.
Minutes of today's meeting, released for the first time, showed that some members, who were not named, argued that inflation has remained above target for a long time and that higher commodity prices were adding to cost pressures.
Others gave more weight to the difficulty of assessing underlying inflation pressures and favoured waiting for more information and, in the end, the policy committee was unanimous in keeping rates on hold at this time, Norges Bank said.
The central bank cut rates twice last year and flagged possible further easing at its January meeting.
However, inflation has been higher so far this year than projected last autumn, Bache told Reuters.
"That is one of the reasons why we revised upwards our inflation forecast going forward, and one of the reasons why we now think there's a need for more restrictive monetary policy," the governor said.
Several other central banks have already warned that the Iran war could reignite inflation, signalling a readiness to tackle any surge with tighter policy.
Norway's annual core inflation eased as expected in February to 3% from 3.4% in January, but remains above the central bank's 2% target, and the central bank today raised its 2026 core inflation forecast to 3.3%, up from 2.7% seen in December. Next year's forecast was raised to 2.8% from 2.4%.
Bache said domestic price developments, rather than imports, were currently the primary driver of inflation.
The Iran war and higher-than-forecast inflation are now at the forefront of the central bank's thinking, said Oeystein Doerum, chief economist at the Norwegian Confederation of Enterprises.
"Taken together, this makes Norges Bank concerned that households and businesses will plan on inflation remaining high," he said.
"If that happens, it could become even harder to bring inflation back down," he added.
