MNI NORGES WATCH: 25bp Hike With 4.25% Peak Still In Play

Norges Bank raised its policy rate by 25 basis points to 4% at its August meeting and said its next hike would likely come in September if the economy evolves broadly in line with forecasts it published in June.

The decision was not accompanied by new forecasts, but June’s projected rate path showed the policy rate peaking at 4.25% in the autumn and staying there until the third quarter of 2024 before falling steadily to 2.9% over three years. With the economy so far performing much as expected, and the analysis published on Thursday by the Monetary Policy and Financial Stability Committee noting both upside and downside risks, the hiking cycle could be on track to end in September

"Overall economic developments have been broadly in line with expectations,” the Committee said, pointing to continuing labour market tightness but easing price pressures, and adding that a "somewhat higher policy rate" would be needed to get inflation back to target. (See MNI NORGES WATCH: Inflation Dip Points To 25bp Hike)

SEPTEMBER FORECASTS KEY

September’s quarterly forecast round will be key, but it looks likely that its projections will not differ much from June's.

The Committee highlighted the importance to the rate outlook.of the krone, which has appreciated markedly more than the assumed.

If the krone is "weaker than previously projected or pressures in the economy persist, a higher policy rate than signalled in June may be needed to bring down inflation" but "if there is a more pronounced slowdown in the Norwegian economy or inflation declines more rapidly, the policy rate may be lower than envisaged in June," the Committee said.

Market reaction to the announcement was subdued, with the krone initially strengthening slightly before rapidly reversing and with analysts who had previously forecast a 4.25% peak quick to reassert their prior view, while noting Norges Bank's emphasis on data dependency.