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The Norges Bank maintained rates at 4.50% at its June decision, matching market expectations. Guidance accompanying today’s decision skewed hawkish, however, with an upgrade to the projected medium-term path for both inflation and rates.

On this point, the key line was once again offered by Governor Ida Wolden Bache, noting that “If the economy evolves as currently envisaged, the policy rate will continue to lie at 4.5 percent to the end of the year, before gradually being reduced”. If realised, this would likely make the Norges Bank one of the last G10 central Banks to begin easing policy, implying that rate differentials should continue widening in favour of NOK upside through the second half of this year.

This is being reflected in market price action following today’s announcement, with the krone strengthening notably against the euro.

While today’s policy decision was never in doubt—19 of 19 economists surveyed by Bloomberg had expected policy rates to remain unchanged—the extent of the Monetary Council’s hawkishness appears to have caught some a little off-guard. The Norges Bank was already amongst the most hawkish G10 central banks in advance of today’s meeting, with risks that policy easing in Norway could lag that in the US.

Now, the Norges Bank looks likely to begin easing much, much later if this latest commentary is to be believed. This is all the more surprising given that inflation has tracked below Bank staff forecasts over recent months, a point recognised in today’s policy statement.

Instead, this disinflation progress appears to have been outweighed by signs that growth is proving more resilient than expected, a dynamic that saw significant upgrades to the expected path for both headline and core inflation for 2025 and 2026, requiring rates to remain high for longer to return inflation back to target.

Looking through the details of the policy report, today’s projections saw almost all factors considered by the Norges Bank contribute to the upwards revision to the rate path. Most significantly, domestic demand added 13bps to the rate path in Q1 2025, and 7bps in Q1 2026, while prices and wages added 7bps and 8bps in the same periods. The only factor not weighing in favour of a more hawkish rate path revision was the exchange rate, with NOK now expected to be modestly stronger than projected in the March policy report, albeit today’s projections envisage just a 1% appreciation of the krone on a trade weighted basis when compared to pre-announcement levels.

That all being said, we are inclined to disagree with Bank staff on this last point. Resilient growth, widening rate differentials and an improving external risk environment offer the conditions for strong NOK appreciation in the coming months.

Indeed, our own base case looks for the krone to appreciate by roughly 5% against both the dollar and the euro between now and year end. If we are correct, then this would offset much of the other hawkish revisions delivered today. As such, while the Norges Bank has pushed back its easing path, we think there remains a risk that currency appreciation could put the prospect of rate cuts back on the table towards the end of 2024.

For now, though, markets are taking the Norges Bank’s rhetoric at face value, with EURNOK falling by 0.5% immediately following the decision and only modestly retracing as the details of today’s report are digested.

The Norges Bank upgrades its projections for both headline and core inflation in response to resilient domestic conditions, signalling that rates will have to remain high for longer in order to bring price growth back to target 

 

 

Author: 
Nick Rees, FX Market Analyst

 

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