Norges Bank likely to keep interest rate on hold in October, unlikely to signal changed stance, says Danske Bank

The Norwegian central bank, Norges Bank, is likely to keep the sight deposit rate on hold a 0.50 percent during its October meeting, according to a Danske Bank research report. There has been very little new economic information since the September meeting. Moreover, given that there is no Monetary Policy Report due this month, the central bank is not expected to signal a changed stance, noted Danske Bank.

During its September meeting, the Norges Bank stayed pat and introduced an explicit ‘neutral’ bias in its statement. The rate path continued to be dovish, implying a 40 percent likelihood of a rate cut. This is interpreted as an ‘insurance’ premium against a softening data and/or a considerable appreciation of the NOK, said Danske Bank.

“As we expect neither of the two our base case remains unchanged key policy rates for the next 12M”, added Danske Bank.

The Regional Network Survey affirmed the August expectations of a moderate growth output for the coming six months and as the housing market continues to rise, the bar for lowering rate appears high at this level. Governor Olsen’s speech two weeks ago also gave a similar impression. He had repeated the intentions of monetary policy ‘leaning against the wind’, stated Danske Bank.

Since September, there have been a few disappointing releases of reports. Manufacturing production in Norway dropped sharply. It might be noise, but markets might look for stabilization next month that might closely reflect the signals from the leading indicators with the likes of PMIs and the SSB’s confidence indicators, according to Danske Bank.

Moreover, core inflation dropped sharply in September; however, this shows that imported inflation is declining due to the NOK effect dropping out faster than anticipated. Lastly, the 2017 fiscal budget was a tad less expansionary than the central bank expected, however, this is unlikely to impact the rate setting.