News & analysis

The Norges Bank has maintained the deposit rate at 4.50% as widely expected, in line with our pre-announcement call. With no surprises expected or delivered in the headline decision, and no monetary policy report this time out, all attention heading into today’s event was squarely on the policy statement, where Governor Ida Wolden Bache all but confirmed an end to policy tightening.

Whilst it was largely assumed based on the December communications that policymakers were likely finished with rate hikes, the Bank had left the door ajar for a resumption in policy tightening. This has now been slammed shut. A comment that “The Committee assesses that the policy rate is now sufficiently high to return inflation to target within a reasonable time horizon” now definitively shifts the conversation towards just how long policy rates will stay at current levels before the Bank can start to deliver cuts.

In our view, this likely happens in Q3, earlier than the Bank expects, though this will depend in part on the performance of the krone. We think improving risk conditions should see NOK strengthen over coming months, aided by the Norges Bank’s commitment to a high for longer stance.

For now though, the krone has remained relatively unmoved on today’s on expectations announcement, strengthening only marginally against the euro.

As we noted in advance of today’s decision, the key factor underpinning December’s surprise rate hike was almost certainly a bout of currency weakness in the lead up to that meeting. Admittedly, if sustained, this could have significantly raised imported inflation pressures, though we also felt at the time that this weakness was likely temporary. Even so, policymakers felt sufficiently concerned to raise rates to defend the krone. Since then, however, NOK has rallied strongly, with EURNOK down -4.2% from its mid-December high as a consequence. This is largely a function of the krone’s high beta to global risk conditions, which have improved over the last six weeks. That said, a reduced rate of foreign FX purchases at the beginning of the new year, reflecting the government’s updated spending plans for 2024, likely also helps.

Combined with a stabilisation in oil prices, and a general risk on move across markets, we suspect that NOK now poses a downside risk to Norges Bank inflation forecasts. Indeed, this fact was apparently recognised in part by the MPC today, noting that the krone is stronger than expected, albeit accompanied by a suggestion that the overall prospects for the Norwegian economy do not appear to have changed materially since December.

In our view, the labour market continues to soften, growth is below potential, and NOK should continue to rally over the medium term, all of which should see inflation cooling back to target faster than policymakers expect in the coming months. Therefore, whilst the MPR had indicated an 80% chance of a cut by Q4, we think policymakers will most likely cut for the first time in Q3. That said, this is unlikely to be confirmed in public by Norges Bank officials in any case. Indeed, that “the policy rate will likely be kept at that level for some time ahead”, will likely be a mantra over the next few meetings, with policymakers aware that a premature shift in tone could see markets front running any rate cuts. If maintained, this high for longer stance should help support the krone at the margin.

Combined with a continued pick up in global risk conditions, this should set the scene for NOK to continue rallying through 2024.

 

Author:
Nick Rees, FX Market Analyst

 

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