Norges Bank’s ‘uncertainty premium’ weighed on NOK

Norges Bank (NB) has really surprised the market several times over the past 12 months. For example, the market was strongly positioned for a rate cut at the policy meeting in March 2015 but when NB stayed on hold, the NOK instead strengthened sharply. 

Arguments for staying on hold were the high rate of credit growth and that NB wanted confirmation of the weakened growth outlook before cutting rates. This March reluctance subsequently caught the market off guard, as market participants have several times underestimated NB's willingness to cut its rates. For example, the recent policy decisions in June and September both led to substantial NOK weakening, as Governor Olsen both times cut rates indicating a high probability of a further cut.

"According to our microstructure model, which is based on currency flows, the NOK weakened by more than a statistical/historical relationship would suggest in September. From our viewpoint, NB's ability to surprise the market is precisely the reason for the further increase in the NOK risk premium, in turn overdoing the weakening effect that could be explained by the drop in Norwegian interest rates", says Danske Bank.