MNI INTERVIEW: Norges Head Sees No Risk Skew In Bank Rate Path

MNI (OSLO) - Norges Bank does not see any meaningful skew in the balance of risks to its updated rate path despite sharp swings in rate expectations for the Federal Reserve and and the ECB, with an approaching easing cycle for the Oslo-based central bank most likely to start in Q1 2025, although there is still some chance it could come in late 2024 or even be delayed, Governor Ida Wolden Bache told MNI Thursday.

"If we had intended to communicate a certain tilt to that balance (of risks) we would have done so. We have a very precise interest rate forecast. It is slightly lower now in the fourth quarter than it was in the June report and it is also slightly lower than 4.5% so that communicates the base scenario quite precisely," she said in an Interview.

The Bank's Monetary Policy and Financial Stability Committee left policy on hold at 4.5% at its September meeting and stated that its latest forecast showed the first cut of this cycle will most likely come in Q1 2025. Norges Bank's model-based projection lowered the rate path by 7 basis points by end-2024 compared to the June outlook but policymakers' largely offset this with 'judgement' that added 5 bps.

POLICY PATH

Since the June forecast round, Norges Bank's policy path has been buffeted by offsetting factors, including another bout of krone weakness which pushed up on inflation, and expectations of more substantial policy easing from major central banks, which pushed down via the interest rate differential channel.

According to Wolden Bache, events since June pointed "in opposite directions for the policy rate forecast". 

"We have the exchange rate and petroleum investment on one side ... we have lower than expected inflation and lower interest rates abroad pulling in the other direction and overall the policy rate path is little changed but slightly lower. We do not base policy on the basis points from that model exercise," she said, adding that the scale of the judgement call was not large historically.

KRONE WILDCARD

Once again, Norges Bank convention of projecting a broadly flat exchange rate was undermined by another bout of krone weakness that had to be factored into the September forecasts. Wolden Bache acknowledged one currency risk is that perceived weaker structural demand for oil will weigh on the krone and there is plenty of evidence it suffers in periods of global market turbulence. 

"Over the summer we have had (moves) in the interest rate differential, we have seen the oil price declining and we also had a period of (market) turmoil which historically has a tendency to go together with a ... (weaker) krone," she observed.

Lower structural demand for oil, in part due to the shift to alternative energy sources, is "one potential explanation for the depreciation in the real exchange rate over the past 10 years. We still believe we have sufficient evidence to say that the interest rate differential matters and also that there is a correlation between volatility and uncertainty in the international financial markets and the krone," she said, but Norges Bank looks set to keep projecting a broadly steady krone.

While multiple factors feed into Norges Bank's assessment of the krone, policymakers will  continue to "estimate it as a fairly constant rate," she said, leaving sharp currency moves as a wildcard.