Norges Bank likely to keep target rate unchanged at December meeting

Recent data from Norway shows a very slow recovery from the oil market-related downturn. Q3 mainland GDP increased by a meager 0.2 percent q/q. Current Norwegian inflation is high, core inflation in October was 2.9 percent, unchanged from September.  As the effect of the weak currency diminishes, Norway's inflation is expected to drop significantly in 2017, below the inflation target of 2.5 percent.

Interbank interest rates in Norway have continued decoupling from the target interest rate.  The spread has been about the double the normal level of around 30bps in recent months and the central bank has not introduced any liquidity measures to address the elevated spread.  Currently, the 3M Nibor is 1.09 percent and if the spread fails to decline going forward it will be a challenge for monetary policy.

The Norges Bank’s most recent projection suggested a relatively low probability of a target rate change going forward with a target interest rate trough of 0.40 percent in Q3 17.  Market currently discounts a trough in the 3M Nibor of around 1.00 percent in spring 2017.

"In 2017 we may see Norway facing a decline and too low inflation in an environment of higher international inflation and interest rates. This could suggest slightly lower Norwegian interest rates relative to peers," said Danske Bank in a report.

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