By Terje Solsvik

OSLO (Reuters) -Norway's central bank cut its policy interest rate by 25 basis points to 4.25% on Thursday and said there were more cuts to come due to a more benign inflation outlook, a decision that took most analysts by surprise and weakened the currency.

"The economic outlook is uncertain, but if the economy evolves broadly as currently projected, the policy rate will be reduced further in the course of 2025," Norges Bank said in a statement.

The policy rate could be cut one or two more times by the end of the year, Governor Ida Wolden Bache later told a press conference, lowering borrowing costs to either 4.0% or 3.75%.

By the end of 2028 the rate will likely stand at about 3%, Norges Bank said. Thursday's cut was the first since 2020.

The Norwegian crown initially weakened to 11.56 against the euro from 11.48 just before the 0800 GMT announcement, but regained lost ground to trade at 11.50 at 0858 GMT.

Norges Bank had held its interest rate last month at 4.50%, the highest level since 2008, after postponing in March a long-planned monetary easing due to an unexpected rise in consumer prices.

Of the 26 economists in Reuters' June 11-16 poll, 23 had forecast that Norges Bank's key interest rate would stay at 4.50% on Thursday, while only three predicted a cut to 4.25%.

"Inflation has declined since the monetary policy meeting in March, and the inflation outlook for the coming year indicates lower inflation than previously expected," Bache said in a statement.

"A cautious normalisation of the policy rate will pave the way for inflation to return to target without restricting the economy more than necessary," she added.

Core inflation in Norway eased more than expected in May, slowing to 2.8% year-on-year, but remained above the central bank's 2.0% target.

NORWAY'S PM WELCOMES MOVE

The rate decision comes ahead of a parliamentary election in September, with latest polls suggesting that the minority Labour government may be re-elected.

In a rare public statement after a central bank rate decision, Prime Minister Jonas Gahr Stoere welcomed the move.

"This is especially good news for everyone with loans," Stoere told news agency NTB.

The Norwegian policy stance has so far contrasted with other Western central banks, most of which started cutting rates last year as growth slowed and inflation waned.

"The central bank remains vigilant: if wage and price growth remain higher than projected, there will be fewer interest rate cuts," Oeystein Doerum, chief economist at the Confederation of Norwegian Enterprises, said in a statement.