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SEB: Sees Year-End Rates at 1.75% - Below Consensus

NORGES BANK
  • We believe a 50bps rate rise is unlikely: Norges Bank is not “behind the curve”, domestic inflation is not showing signs of being “persistent” and household interest rate sensitivity is very high. Norges Bank is likely to favor faster rather than larger hikes.
  • SEB see the inflation dynamics as supporting their forecast of a further 25bps increase at the following Aug 18 intermediate rate decision.
  • We do not believe that Norges Bank believes it is behind the curve, implying there is no immediate urgency to deviate from its guided 25bps increase at the upcoming meeting. Moreover, as a first step Norges Bank is likely to speed up the pace of hikes, rather than the size. The bank has so far sticked to signal rate increases at its MPR meetings, but there are two remaining intermediate decisions this year (Aug 18 and Nov 3) implying that the policy rate could be lifted by 125bps in 25bps steps to 2.00% by year-end, which is above Norges Bank’s estimate of a neutral policy rate.
  • We expect the front-end of the path to be lifted by 30-35bps, implying four additional rate hikes this year with a possibility for five hikes which would leave the policy rate by year-end between 1.75-2.00%. Further out, we expect Norges Bank to stick to its cautious approach implying one 25bps hike per quarter in 2023 and a year-end policy rate around 2.75% (vs. previously 2.50%). The long end of the path is likely to become more inverted, reflecting a less positive output gap further out.
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  • We believe a 50bps rate rise is unlikely: Norges Bank is not “behind the curve”, domestic inflation is not showing signs of being “persistent” and household interest rate sensitivity is very high. Norges Bank is likely to favor faster rather than larger hikes.
  • SEB see the inflation dynamics as supporting their forecast of a further 25bps increase at the following Aug 18 intermediate rate decision.
  • We do not believe that Norges Bank believes it is behind the curve, implying there is no immediate urgency to deviate from its guided 25bps increase at the upcoming meeting. Moreover, as a first step Norges Bank is likely to speed up the pace of hikes, rather than the size. The bank has so far sticked to signal rate increases at its MPR meetings, but there are two remaining intermediate decisions this year (Aug 18 and Nov 3) implying that the policy rate could be lifted by 125bps in 25bps steps to 2.00% by year-end, which is above Norges Bank’s estimate of a neutral policy rate.
  • We expect the front-end of the path to be lifted by 30-35bps, implying four additional rate hikes this year with a possibility for five hikes which would leave the policy rate by year-end between 1.75-2.00%. Further out, we expect Norges Bank to stick to its cautious approach implying one 25bps hike per quarter in 2023 and a year-end policy rate around 2.75% (vs. previously 2.50%). The long end of the path is likely to become more inverted, reflecting a less positive output gap further out.