Norges Bank stands pat in December, indicates first hike by end-2018

The Norges Bank kept its key interest rate on hold at 0.5 percent today, as was expected. But the central bank lifted the interest rate path and the first hike is moved forward to end-2018, noted Nordea Bank in a research report. In the central bank’s previous rate path a full hike was projected in the summer of 2019. The new rate path has moved the first hike two quarters closer in time.

“The interest rate forecast is at 74bp in Q1 2019, which indicates the first hike at the December meeting in 2018. However, a hike is not fully discounted in December, that would require a forecast of 75bp in Q1 2019”, stated Nordea Bank.

The subdued NOK is the main reason for the upward revision, which might lift inflation. The central bank’s inflation forecast was upwardly revised by 0.4 percentage points for both 2019 and 2020. Moreover, oil price have risen, and the outlook for international growth has rebounded.

The outlook for the output gap was also revised up significantly. But the outlook for domestic economy argued for lower rates in the rate path because of lower growth in household and public demand.

There is still risk for a further upward revision to the central bank’s projection for jobless rate and capacity utilization, said Nordea Bank. The NOK firmed following the central bank’s decision today.

“We expect further strengthening during the remainder of the year to be limited as the market seems reluctant to put on new NOK long positions towards year-end”, added Nordea Bank.

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