(recasts, adds analyst and CEO comments)
OSLO, Jan 4 (Reuters) - The inflation in Norway's housing prices accelerated to 12.8 percent year-on-year in December, the highest rate since mid-2007, real estate industry data showed on Wednesday, further reducing the probability of central bank rate cuts.
Seasonally adjusted housing prices rose by 1.1 percent in December from November, Real Estate Norway said, above a central bank forecast of 0.8-0.9 percent as low interest rates, easy access to credit and population growth drove demand.
The central bank in December held its key policy rate unchanged at a record-low 0.5 percent and said it would most likely stay flat for a significant time, but added the chance of a rate cut was still greater than that of a hike.
"As long as house price inflation remains at this level it is unlikely that the central bank will cut interest rates further unless the economy is exposed to new large negative shocks," DNB Markets economist Jeanette Strom Fjaere wrote.
Handelsbanken Capital Markets said it expected interest rates to remain at 0.5 percent for the foreseeable future.
"We also believe Norges Bank will continue to worry about financial instability stemming from the housing market for a long time, unless the housing market cools considerably faster than Norges Bank now expects," Handelsbanken added.
Real Estate Norway Chief Executive Christian Dreyer predicted housing prices will grow on average by between 9 and 11 percent in 2017, compared to an average increase of 8.3 percent in 2016 from 2015.
As home building picks up pace however, and the growth in population starts to level off, the market may begin to cool, he added.
"We are getting closer to a balance, and we are closer to covering demand," Dreyer said, adding that a tightening of mortgage regulations, announced in December, would probably have an effect on prices.
"But I don't fear a sharp correction in the short term," he added.
Norway's crown currency edged higher against the euro to stand at 8.9855 at 1320 GMT from 9.0081 just ahead of the 1000 GMT release.
The housing data was compiled by Real Estate Norway, FINN and Eiendomsverdi. (Reporting by Camilla Knudsen and Ole Petter Skonnord, editing by Terje Solsvik)