OSLO (Reuters) - Norway’s consumer price inflation rose sharply in January to its highest level in more than three years, increasing the chance of an interest rate hike in 2020 and strengthening the crown currency.

Core inflation, a key measure for monetary policy, stood at 2.9% year-on-year, Statistics Norway (SSB) said on Monday, up from 1.8% in December. Analysts in a Reuters poll on average had expected a rebound to 2.0%.

Food, transport and several service categories were among the factors pulling up prices, SSB said.

Norway’s central bank, which targets core inflation of 2.0% over time, had forecast a January reading of 2.2%.

The fastest annual pace of consumer price growth since October 2016 could trigger demands for bigger pay increases in collective bargaining rounds between labour unions and employers, with potential consequences for monetary policy.

“If inflation continues at an elevated level (for) the first months in 2020, it may affect the wage settlement,” DNB Markets economist Kyrre Aamdal said in a note to clients. “The risk for a rate hike in 2020 has increased after today’s figures.”

Norway’s crown currency initially rallied by 0.5% against the euro on the news, hitting a high of 10.1090, before softening to trade at 10.1267 per euro at 0934 GMT.

The currency weakened last year despite several central bank rate hikes and hit an all-time low of 10.3121 versus the single currency in October.

Central bank governor Oeystein Olsen is expected to give a broad outline of the country’s economic prospects in an annual speech to Norwegian business leaders and politicians this week.

While Norges Bank has said its key interest rate is expected to remain on hold for the foreseeable future, it has also warned that an upwards spiral of inflation could lead to further tightening.

The central bank’s next decision on interest rates is due on March 19.

The January inflation reading surprised “massively on the upside”, SEB economist Erica Blomgren Dalstoe tweeted, adding that it will force the central bank to revise up its projections for consumer prices.

But recent economic data -- including fourth-quarter growth figures -- that have pointed to a slowdown in the Norwegian economy make rate hikes less likely, economists have said.