Norwegian central bank keeps interest rate on hold, likely to hike in September

Norwegian central bank kept its key interest rate on hold, but signals that rates would be hiked in September. As widely anticipated the key rate was unchanged at 0.5 percent. A September hike is fully discounted in the rate path. According to the path the next hike might follow in March 2019 and September 2019. The path is a bit higher than the one in March.

The main message in the MPR was much as anticipated. Lowe than expected inflation argues for a lower path and so do rates and growth abroad, noted Nordea Bank in a research report. Increased oil prices, stronger domestic demand and NOK remaining soft given the increase in oil price is the main reason why the path is still slightly higher than in March.

Going forward, news is expected to be considerably on the downside to avert Norges Bank from hiking in September. In the case of news moderately on downside, Norges Bank might choose to lower the path rather than postponing the first hike, stated Nordea Bank.

But the risk surrounding the new rate path is if anything on the upside. Inflation is likely to stay low with third quarter forecast at 1.3 percent on average, compared to the current level of 1.2 percent. The central bank also projects a significantly stronger NOK in the future.

“Norges Bank's view of a stronger NOK means that we can still see a quite significant NOK strengthening before the NOK being a constraint on monetary policy. In terms of EUR/NOK Norges Bank's forecast can be trasferred into 9.20 in Q4, not too far from our forecast of EUR/NOK at 9.25 in three months”, added Nordea Bank.

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