Norges Bank likely to leave key interest rate unchanged

The Norwegian central bank, Norges Bank, is mostly likely to leave its key rate unchanged at 0.5 percent during its meeting on Thursday, according to Nordea Bank. In its latest MPR, which was released in June, the central bank gave quite a clear message. It had signalled a rate cut in September given no major surprises. It even highlighted that news, both on the upside and the downside, might have a less impact on its view on interest rates than normal. Still, it would be quite a surprise if the central bank lowers the interest rate.

Norges Bank’s own business survey, Regional Network, and actual GDP figures, clearly shows that the economy has passed a turning point, noted Nordea Bank. The main reasons for the projection of unchanged rates are lower level of unemployment, a higher level of inflation and much stronger housing market.

Currently, jobless rate in Norway is 0.2 percent lower than the June forecast. This is expected to lift the projection for the output gap by almost 0.4 percentage points. Meanwhile, inflation has remained close to 0.75 percentage points above forecast in the last months. This signifies higher forecast for wage growth and therefore future inflation.

On an average house prices have risen 1 percent since the June report was published, much more than projected by the central bank. This signifies increased risk of financial instability and higher growth. Housing investment has picked up strongly and housing starts indicate towards a continued solid growth.

The stronger than anticipated figures in the summer should be sufficient to raise the rate path considerably and enough to avert a rate cut during the September meeting. But it is unlikely that the Norges Bank would remove the downside basis to the path entirely.

“We guess the path will bottom out at 0.40 percent. That will indicate that there is a probability of a rate cut but by less than 50 percent”, added Nordea Bank.

This might be seen as a sign that the Norwegian central bank is on its way to a full neutral stance. This should be consistent with pricing in the interest rate market. Short term rates have increased in the summer, consistent with stronger than anticipated key figures.

A hint from the Norges Bank that it gradually moves to a neutral stance because of a stronger economy might be a trigger for an increased focus on the domestic economy and less on short term movements in the oil prices. Therefore, NOK is expected to strengthen.

“In the case Norges Bank cut rates one must expect it to signal that this was the last cut and the rate path will probably be much stepper than the one from June. Still interest rates should drop and NOK weaken significantly”, stated Nordea Bank.