Norges Bank to lower key policy rate later in September, NOK likely to strengthen eventually

Norges Bank, during its last meeting, had clearly hinted that it will further lower rates; however, it will take time. Also, the central bank showed reluctance to lower rates below zero. Hence, Norges Bank is now likely to lower rate next in September, according to Nordea Bank. The conclusion can be drawn from the anticipation that Norges Bank will be slow in combating a likely appreciation of NOK.

Norges Bank’s March monetary policy report stated the rate path bottom was 0.2%, showing a “100%” possibility of another cut and a 20% chance of further reduction to zero. However, the rate path showed that the central bank is not in a hurry to lower rates. It gave just one-third of a possibility for rate cut in June, but provided a “100%” chance for a reduction in September.

Moreover, the central bank’s statement showed that it will require a lot for it to lower rate faster. If the central bank were to take its usual reaction function, it would have hinted more reductions and at a rapid pace in its report, according to Nordea Bank. However, the key policy rate was nearing a “lower bound” that indicates the central bank will be “proceeding with greater caution in interest rate setting”.

The central bank’s hints indicate that the currency will appreciate strongly or the economic outlook will worsen considerably for it to lower rate in June. However, there is a slight doubt if Norges Bank will lower rate in September, noted Nordea Bank. The rate path’s reduced sensitivity to surprises suggests that the central bank will be less responsive to an appreciation of NOK, added Nordea Bank.

Slower reductions in rate argue for an appreciation of NOK, according to Nordea Bank. NOK is expected to appreciate to the point where the central bank will react. According to Norges Bank governor’s 2015 yearly speech, a weaker currency is the main contribution of the monetary policy to reform Norway’s economy.

Nordea Bank noted that its projection of the currency’s appreciation suggests a gradual reduction of the bottom of the rate path, and a reduction to zero in the end. This is most likely to take place in H1 2017.