Norges Bank to lower short rates

Norwegian economy growth has been below trend for a couple of years now and unemployment on the rise since 2013. This means that the economy already is in a situation with considerable slack and low wage pressure. Inflation is currently on target, but should undershoot significantly once the inflationary effect from a last year's weakening of the krone has fed through. We think this will happen early next year.

"With risks so obviously skewed to the downside, the market should trade Norges Bank from an easing bias for a long time to come. However, actual rate cuts could take time to materialise and complicates, states Nordea Bank.

Selling FRAs outright seems risky at current levels. Through this easing cycle, the FRA strip has tended to discount 1-2 cuts and currently trade in the middle of this range. Add to this that less liquidity in the banking system should increase money market spreads and lift the NIBOR fixing in the coming months and there is room for rates to move higher in the short term even though their medium term view is that rates should come down further as cuts are delivered, says Nordea Bank.