Norway keeps interest rates on hold, eyes December hike

By Terje Solsvik

OSLO (Reuters) - Norway's central bank kept its benchmark interest rate unchanged at 4.25% on Thursday, as widely expected, and said it would likely raise the cost of borrowing next month unless inflation showed a continued decline.

All 29 economists polled in advance by Reuters had expected rates to stay on hold on Thursday but were divided over whether the bank would hike to 4.50% in December.

"Based on the committee's current assessment of the outlook, the policy rate will likely be raised in December," Norges Bank Governor Ida Wolden Bache said in a statement.

"If the committee becomes more assured that underlying inflation is on the decline, the policy rate may be kept on hold," she added.

The crown strengthened to 11.81 against the euro at 0915 GMT, from 11.83 just before the announcement.

"Norges Bank still warns it will hike in December, though it has become more uncertain," Nordea Markets analysts said in a note. "We believe interest rates will be kept on hold due to lower inflation figures than Norges Bank estimates."

Norwegian consumer prices have fallen faster than expected in recent months, below the central bank's forecasts as well as those of analysts, but they still exceed the official 2.0% inflation target.

Headline annual inflation stood at 3.3% in September, down from 4.8% in August and below Norges Bank's forecast of 4.2%.

Core inflation, which excludes energy costs and changes in taxation, stood at 5.7% in September, below a central bank prediction of 6.2% and down for a third straight month since hitting a record in June of 7.0%.

"The labour market is still tight, but pressures in the Norwegian economy are easing. Inflation is markedly above the 2% target. Consumer price inflation has moved down, but underlying inflation is high," Norges Bank said.

"In the committee's assessment, the policy rate is likely close to the level needed to tackle inflation, which provides the Committee with a little more time to assess whether there is a need to raise the policy rate further," it added.

The Norwegian crown has resumed a weakening trend in recent months, falling against the euro, the dollar and other currencies, causing concern this may stoke inflation as imports become more expensive.

On a trade-weighted basis, the currency had weakened by around 6% from early August until Wednesday's market close.

The U.S. Federal Reserve on Wednesday kept rates steady as policymakers struggled to determine whether more increases were needed or not.

The European Central Bank kept its policy on hold last week, as expected, maintaining the benchmark rate at a record 4.0% and hinted at a steady policy for the time being.

The Bank of England will also announce its latest rate decision on Thursday and is expected to stay on hold. (This story has been refiled to say core inflation, not cone, in paragraph 9)

(Reporting by Terje Solsvik, editing by Gwladys Fouche and Christina Fincher)