Norges Bank is set to meet next week for its policy decision. According to a DNB Market research report, the central bank is expected to keep policy rates on hold but hike the rate path in 2020 to 2022.
The central bank had hiked the policy rates during its September meeting and guided for unchanged rates “in the coming period”. This was repeated at the October meeting. Based on this guideline, trends in the Norwegian economy and financial markets do not justify a rate hike in December, said DNB Markets. In the rate path from September the policy rate rose to 1.58 percent in the first quarter from 1.5 percent in the fourth quarter and was peaking at 1.6 percent in the fourth quarter 2020. Therefore, an unchanged policy rate in the first quarter was the most likely outcome, but a rate hike was more likely than a rate cut.
The economic trends since the September meeting have been mixed. The NOK has fallen significantly compared to Norges Bank’s September forecast. A weaker NOK normally contributes to raising the rate path. Internationally, interest rates have risen by a few basis points since September and the risk of an imminent global recession has dimmed.
On the other hand, below expected growth in mainland GDP and employment in the third quarter, and October inflation slightly below expectations are arguments for a lower rate path, according to DNB Markets. Household credit growth and house price growth have fallen slightly more the past months than Norges Bank expected.
“The weakening of the NOK seems to be the dominating factor, but Norges Bank may be reluctant to tie rate changes too tightly to currency movements. In assessing the pros and cons we expect Norges Bank to present a new rate path signalling 50% probability of a rate hike in March and a rate hike in June more likely than not”, added DNB Markets.
