MNI NORGES WATCH: Seen On Hold, Eyes On September Cut Guidance

Norges Bank is widely expected to continue its prolonged policy pause at its June meeting, leaving its key policy rate where it has been since December 2023 at 4.5%, though it is possible its guidance and rate projection could provide a clearer indication of the timing of the first cut of an easing cycle.

Guidance accompanying the May decision was for the policy rate to "most likely be reduced in the course of 2025" and analysts are divided over whether the Norwegian central bank will repeat this or provide a more detailed steer, perhaps by tilting towards a September cut.

June has already been priced out by the market, while August is an interim meeting, with history showing that the central bank is much more likely to move in a quarterly meeting, which is accompanied by projections.

In January, Norges Bank had stated that if things evolved as expected it would "reduce the policy rate in March," but when the March meeting came amid global trade tensions it held fire and switched instead to talking about a cut at some point in 2025.

Some analysts judge that this experience means Norges Bank's policy committee will be reluctant to provide meeting-specific guidance again, though Governor Ida Wolden Bache has insisted that the option remains on the table. (See MNI INTERVIEW: Trade Scenarios Cloud Outlook - Norges Head)

KRONE

The June meeting will also see a fresh set of forecasts and a new in-house rate projection. The March rate path priced in a couple of 25-basis-point cuts by end-year and this time the near-term projection could, if anything, be raised a touch to suggest some possibility of staying on hold for longer, though the three-year forecast end point of 3% could be left unchanged.

Norges Bank's latest quarterly business survey, its June Regional Network Report, was pretty robust, with higher defence spending, tourism and aquaculture output all expected to support growth in the near term and annual wage growth predicted to be 4.5% in 2025 and 4.0% in 2026, helping to prop up demand. 

Policymakers have repeatedly cited krone weakness as an upside inflation risk but recently the currency has been volatile rather than soft. The latest import-weighted reading on Norges Bank's  I-44 index, of 116.38, was the strongest since August 2023, with a lower reading indicating appreciation.

Inflation on CPI-ATE, the core ex-tax and energy target measure, was projected to be 3.4% in March and 3.2% in April in the March Monetary Policy Report. It came in as expected in March but undershot in April, dropping to 3.0%.

Further softening in near-term inflation would make it easier for Norges Bank to steer to a September cut as it would reduce the tension between signalling the start of the cutting cycle and predicting overshoots of its inflation target.