The Norwegian central bank is likely to continue to hold its policy interest rate until at lease late-2014 as a strong currency continues to prevent policymakers from hiking rates to stem a housing boom, Capital Economics European Economist James Howat said Monday.

Capital economics, meanwhile, observed that monetary policy may stay looser for longer given the increasing prospects of the euro-zone crisis deepening this year, which would weigh on external demand for Norwegian goods. A rate cut may even be on the cards if planned macro-prudential measures designed to dampen the housing boom prove effective.

The Norges Bank last week kept its policy rate unchanged at 1.5 percent as expected, and pushed back the beginning of its tightening cycle until spring 2014, rather than cutting rates, due to the opposing concerns of weaker inflationary outlook and a strong krone.

In response to weaker expectations for growth prospects in the euro-zone and its negative impact on the domestic economy, the central bank revised down its GDP forecast for 2013 to 2 percent from the earlier forecast of 3 percent.

The forecast for inflation has been lowered to 1.5 percent from 2.8 percent previously estimated. Further ahead, inflation is expected to only rise to 2 percent in both 2015 and 2016.

According to Howat, the lowering of inflation expectations, and the strengthening of the krone point to the need for looser monetary policy even as the central bank remains concerned that the domestic economy is over-heating.

The fact that Norwegian house prices are rising rapidly and household debt levels are rising faster than income would also add to the case for further monetary loosening, the economist noted.

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