But Norges Bank (NB), which in September raised its rate by 25 basis points for the first time in seven years, also said the recent decline in oil prices and weaker global growth prospects imply a slightly lower path of rate hikes in 2020 and 2021.
"Overall, the outlook and the balance of risks imply a gradual interest rate increase in years ahead," NB said, adding if the policy rate were kept at the current level for a long time, price and wage inflation may accelerate, leading to rapid rate hikes that would then stifle an economic upturn.
In its latest monetary policy report, NB forecast the policy rate - or the rate of return that banks receive on deposits with the central bank - would average 1.0 percent next year and then 1.4 percent in 2020 and 1.8 percent in 2021.
This rate path implies one rate hike in 2019, two hikes in 2020 and another two in 2021.
"Our current assessment of the outlook and the balance of risks suggest that the policy rate will most likely be raised in March 2019," NB Governor Oeystein Olsen said.
NB's forecast for the average policy rate in 2019 is unchanged from the previous policy report in September, but for 2020 and 2021 the latest forecast was cut by 0.1 percentage points.
Norway's economy has been growing solidly since the fall of 2016 but slowed more than expected in the third quarter of this year on lower agricultural production after a dry summer.
Slower global growth and the decline in oil prices will tend to reduce the profits of the oil industry lower growth in coming years but the central bank said there were still prospects for solid growth in investments in the coming year.
Norways economy grew by an annual rate of 1.1 percent in the third quarter of this year, down from 3.4 percent in the second quarter and NB lowered its 2018 growth forecast for the mainland economy by 0.1 percentage point to 2.4 percent.
For 2019 NB projects average growth in gross domestic product of 2.3 percent, down from 2.5 percent forecast in September, growth of 1.6 percent in 2020, down from 1.8 percent, and 1.4 percent in 2021, up from 1.2 percent.
Inflation, on the other hand, has risen in the past year, boosted by higher electricity prices, and higher wages. A weaker-than-expected Norwegian krone has also underpinned rising inflation.
However, NB also said the growth in wages had been slightly lower than expected and the fall in oil prices suggest easier wage growth.
Norways' consumer price inflation rate rose to a 2018 high of 3.5 percent in November, well above the central bank's recently-lowered 2.0 percent target, and NB raised its forecast for inflation to average 1.8 percent in 2019, up from 1.3 percent.
For 2018 headline inflation is seen averaging an unchanged 2.7 percent while inflation excluding taxes and energy product was seen at 1.5 percent, up from 1.4 percent.
For 2020 NB forecast headline inflation of 1.6 percent, up by 0.2 percentage points from its September forecast, and 1.7 percent inflation in 2021, down from 1.8 percent.
Norges Bank released the following statement:
"The upturn in the Norwegian economy appears to be continuing. Spare capacity has gradually diminished, and capacity utilisation seems to be close to a normal level. Underlying inflation is close to the inflation target of 2 percent.
If the policy rate is kept at the current level for a long time, price and wage inflation may accelerate and financial imbalances build up. That would increase the risk of a sharp economic downturn further out. Raising the policy rate rapidly ahead could stifle the upturn and lead to higher unemployment and inflation that is too low. Uncertainty surrounding the effects of higher interest rates suggests a cautious approach to interest rate setting.
Overall, the outlook and the balance of risks imply a gradual interest rate increase in the years ahead. The policy rate forecast is little changed, but the fall in oil prices and weaker global growth prospects imply a slightly slower rate rise than in the September Report. Inflation is projected to remain close to target in the coming years, at the same time as unemployment remains low. The policy rate path will be adjusted in response to changes in economic prospects.
"Our current assessment of the outlook and the balance of risks suggest that the policy rate will most likely be raised in March 2019", says Governor Øystein Olsen."
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