MNI STATE OF PLAY: Norges Bank Seen Hiking 50bps

Norges Bank, which forged ahead of the central bank pack at the start of the tightening cycle, is widely expected to make another 50-basis-point increase on Thursday, rather than following the example of the neighbouring Riksbank, which surprised by picking up the pace of hikes with a 100-bp move on Tuesday.

Norges Bank’s approach has been to tighten early and to act predictably. Governor Ida Wolden Bache has said that a markedly higher policy rate is needed and that the next move was likely to come this month, but has also highlighted downside risks from higher rates hitting consumption and the housing market and there has been no clear indication that the Monetary Policy and Financial Stability Committee wants to further step up the pace of tightening

Norges started its cycle with a 25bps hike in October 2021 and only made its first 50bps hike in August, lifting the policy rate to its current 1.75%.

Its September forecast round will see a higher near-term peak for inflation but growth forecasts could be nudged down. In its last Monetary Policy Report forecasts, in June, Norges saw the CPI-ATE target inflation measure rising to 4.2% on the year in August, below the 4.7% that materialised. Even in June it saw CPI-ATE holding above the 2.0% target over the next two years, at 3.3% in 2023 and 3.0% in 2024.

The outlook for the broader economy, however, was already fading, and it cut its GDP growth forecasts in June, to 1.1% in 2023 and 0.9% in 2024. Any downside surprises would see the economy close to flatlining.

DIVERGENT OUTLOOKS

The committee's collective rate projection in June, for the policy rate to peak at 3.1% in 2024 and to dip to 2.8% three years ahead, also lags current market expectations, which price in 50bps hikes at each of this year's remaining meetings and imply a peak of around 3.5% by the middle of next year.

The central bank’s own business survey in its quarterly Regional Network Report this month, highlighted the divergent outlooks for growth and inflation,

Business contacts reported an acceleration in price increases while expecting higher costs, prices and interest rates to slow growth. Over the past three months annualised output growth fell to 0.9% from 2.5% in the previous survey, with the outlook for hiring and output in the oil sector markedly stronger than in mainland sectors such as retail. With 57.7% of firms reporting full capacity utilisation the survey supported Norges Bank's view that there is no slack left in the economy.

Firms expected annual wage growth this year to be 4.0%, suggesting that higher inflation is feeding through to wages in a tight labour market.

These survey data appear to provide support for further tightening but with firms anticipating weakness and workforce reductions in response to sagging demand and hiring freezes now kicking in, Norges Bank's policy committee may be wary of delivering a larger-than-anticipated hike.