Norges Bank likely to stand pat in June, may maintain easing bias

The Norwegian central bank is set to hold its monetary policy decision meeting this week. According to a Nordea Bank research report, the Norges Bank is expected to stand pat. The central bank is likely to maintain its easing bias and the bottom of the rate path is expected to be unchanged at 0.4 percent. According to economists polled by Reuters the rates are likely to be unchanged at 0.5 percent. It is also consistent with the rate path.

During its meeting in December and March, the Norges Bank left the bottom in the path on hold at 0.4 percent. The central bank’s reluctance to further lower rates despite news on the downside and forecasting inflation 1 percentage points below target signifies that there are very less possibilities of a lowering of the path. Thus, there is a question if whether the bottom of the rate path would be raised.

In the first quarter, the Norwegian mainland growth came on the upside and the region network shows that growth would be at or above projection in the second and third quarter. Employment was up in line with projection in the first quarter; however, the network shows that growth in employment rose further and above the central bank’s forecast for the second and third quarter.

Meanwhile, the indicators for labor market tightness and capacity utilization in the regional network was up sharply in the second quarter. The Norwegian krone has depreciated and is at present 3 percent weaker than anticipated by the central bank. Spreads in the money market has dropped more rapidly than expected and is now slightly below Norges Bank’s long term forecast. All these above points argue for a higher rate path.

But there are certain points that argue against a higher path as well. For instance, the rate of inflation was 0.3 percentage points below projection last month. Housing prices growth has decelerated considerably and more than projected by the central bank. Rates and dropped among the trading partners. Spot oil prices have dropped. The oil investment survey for the next year was also seemingly subdued, but with certain known projects still missing in the survey and a higher 2017 figure, it is expected to be widely in line with the central bank’s forecast.

Meanwhile, the projection for capacity utilization would be hiked for the whole of the forecast period, noted Nordea Bank. Slightly lower oil prices and house prices are not sufficient to offset that the starting point for the output gap would be upwardly revised. Meanwhile, weaker NOK and slightly higher capacity utilization argue for a higher inflation forecast in 2018-2020. But lower current inflation than expected signifies a lower 2017 forecast.

Given the higher projection for the output gap and slightly higher forecast in the longer term, one can argue that the Norwegian central bank should upwardly revise its rate path. But the Norges Bank, during its meeting in December as well as in March kept rates higher than the outlook for inflation and output gap argued for because of risk liked to low rates and increasing house prices, stated Nordea Bank.

As the housing market as eased the central bank’s worry of financial imbalances should be slightly smaller. Thus they can maintain its easing bias, in spite of improved outlook to reach its goals faster. But as a consequence of improved outlook the first rate hike would possibly move slightly closer in time than in the monetary policy report from March.

The market would focus on the rate path and particularly the bottom in the path. It if is kept at 0.4 percent, nothing much will happen. A higher path further out is unlikely to mean much. However, if the bottom in the path is hiked, it would be hawkish, added Nordea Bank