Norges Bank cut its rate, this is not likely to be the last

NOK weakened significantly on today's decision and is already much weaker than Norges Bank's Q4 forecast for import weighted NOK (I-44). Norges Bank's forecast is 104,5 and currently I-44 is 107,6. This strengthens the case for rates on hold for the remainder of the year.

Today's Norges Bank rate cut brings the key rate down to 0.75%. According to Norges Bank's rate path there is a 25% probability of a rate cut at the December meeting. Further out the path indicates a 2/3 probability of a rate cut by the end of Q2 2016.

Norges Bank was not expected to cut rates today. It was forecasted that rate would be on holds and a rate path that would signal a significant probability of a rate cut later this fall. The main reason behind the rate cut and the rate path is a more pessimistic view on growth. 

Lower oil prices pulls down oil investments throughout the forecast horizon and Norges Bank expects that lower activity in the oil sector could give negative second hand effects to the mainland economy. In addition real wages are revised down by 0.75%-points in 2016 and 0.5%-points in 2017. This also weighs on growth.

Reactions in the FX markets were big today and EUR/NOK is up 20 from this morning. Short rates are down around 10-12bp. Looking at the FRA strip the market is currently pricing in one more rate cut from Norges Bank through 2016, not too far from what Norges Bank is signalling in the rate path.

"Over a longer period rate markets have had a tendency to price in more rate cuts than what Norges Bank's rate path signals. This is expected to be the case this time as well and think short rates could fall further and indicate 1 ½ rate cut from Norges Bank".