MNI NORGES BANK WATCH:  Easing Inflation Makes Hike Tough Call

Easing inflation pressure has raised the chances that Norges Bank could leave its policy rate unchanged at 4.25% this week despite its having stated at the last meeting that it was likely to hike, but currency weakness makes it a tricky call.

In its November policy statement, Norges Bank’s Monetary Policy and Financial Stability Committee caveated its statement that further tightening was likely this month by saying that the policy rate might still be kept on hold if it became "more assured that underlying inflation is on the decline”. Since then the target CPI-ATE core inflation measure came in at 5.9% for November, below the central bank’s forecast of 6.1% in November, and trend inflation has shown signs of easing.

A majority of analysts now predict no change in policy and in an MNI survey late changes to policy calls have shown expectations shifting away from a hike. Firms' downbeat perspectives on the economic outlook in Norges Banks’ quarterly Regional Network Report is another factor arguing against further tightening. The report showed firms expected activity to remain unchanged in Q4 this year before falling in the first quarter of 2024, with spare capacity growing and annual wage growth predicted to fall to 4.5% in 2024 from 5.4% in 2023 as recruitment difficulties ease.

KRONE WEAKNESS

One factor which might tilt the scales back towards a hike, is the weakness of the krone. Norges Bank projected a steady appreciation of the currency on its I-44, trade weighted index in its September forecast round, but instead it has been little changed over the past month. Oil prices and rising international equity indices, which supported an earlier appreciation are no longer supportive and Norges Bank could be tempted to provide support by improving rate differentials while other central banks stay on hold. Brent crude has fallen from around USD93 per barrel in September to around USD74.

Governor Ida Wolden Bache pointed to the inflationary effect of a weakening krone in a speech on Nov 23, noting that it made monetary policy more complicated at a time when the economy is cooling. Still, she restated guidance for a likely December hike and made clear that even if this did not occur rates would remain at high levels for an extended period in a Table Mountain approach.

Norges Bank led the way among advanced economy central banks in starting the tightening circle, with its first hike to 0.25% from 0.0% coming in September 2021. If it hikes again in December it could end up being the final one to tighten.