News & analysis

The release of September’s CPI report this morning saw price growth in Norway massively undershoot expectations, with headline inflation falling from 4.8% to 3.3% YoY, raising chances that the Norges Bank has already conducted the final hike of this tightening cycle.

With headline inflation expected to fall to 4% in September, the emphasis was largely placed on the more persistent underlying measure of inflation, which had supported the Norges Bank’s projections for a likely final rate hike this year, as signalled at the September policy meeting by Norges Bank Governor Ida Wolden Bache. However, even here inflation undershot the Norges Bank and economist expectations. Taken in the context of an unexpected growth slowdown and rising unemployment though, today’s inflation print now puts the notion of a December rate hike in serious doubt. Whilst the news has put the krone on the back foot to start the day, NOK remains an outperformer so far this week on the back of geopolitical concerns and oil prices.

Norwegian price growth undershoots both market and Norges Bank projections

Whilst it is the slowdown in headline figures that will likely grab the spotlight, an easing in price growth is also clear when looking at the underlying numbers.

The CPI – ATE measure closely watched by the Norges Bank, which adjusts for taxes and excludes energy costs, also showed a notable fall. Having been expected to decline 0.2pp from last month’s print of 6.3% price growth YoY, the release instead saw underlying inflation decline to 5.7%. This not only undershoots the market expectation for the September release, but also comes in below Norges Bank forecasts that projected inflation on this measure to run at 6.25% in Q3. It is notable that the unexpected slowdown of inflation has come alongside a broader unanticipated cooling in economic conditions.

Recent figures indicated that growth is also slowing more quickly than expected, with GDP actually contracting 0.2% in August MoM.

Unemployment too has been increasing, rising from 1.8% to 1.9% in August, despite consensus expectations looking for a fall to 1.7%. Not to mention, all of this takes place against the backdrop of a eurozone that is also struggling for economic growth, with speculation increasingly skewed towards the prospect of a recession in the bloc. Indeed, if recent PMI releases are to be believed, this now appears more likely than not, a dynamic that will further weigh on economic conditions in Norway. Taken together, it seems increasingly unlikely that a final hike from the Norges Bank is either necessary or desirable, with any decision to do so risking an over tightening in monetary policy.

That being said, underlying inflation has likely not eased sufficiently for the Norges Bank to call an end to monetary tightening at its next meeting in November. Having had their fingers burnt by slowing inflation earlier in the year, only for price growth to subsequently reaccelerate, policymakers will be cautious of executing a premature dovish turn. Moreover, with the recent rise in oil prices supporting NOK, which should weigh on imported inflation going forwards but also increases forecast uncertainty, policymakers will likely wish to see how current events play out in the Middle East and in oil markets before jumping to any rash decisions.

Instead, we expect that the Norges Bank will follow through on guidance provided at the September policy meeting, “skipping” the November decision.

This should allow for more data to confirm that inflation is indeed slowing more quickly than anticipated, as now appears to be the case. Given this, we now no longer expect a final hike in December. Instead, we believe that the Norges Bank has already hit its terminal rate, though the policy rate is still likely to stay at the current level of 4.25% for some time. For the krone, whilst today’s news has seen a sell-off against the euro, the impact has been relatively muted with EURNOK only up 0.4pp. Instead, geopolitical concerns around oil prices and the prospect of a growing conflict in the Middle East are helping keep the krone supported for the time being, offsetting the drag from falling rate expectations.




Nick Rees, FX Market Analyst


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