MNI NORGES WATCH: Growing Case For Gradualism, Eyes 25bps Hike

Norges Bank looks set to hike the policy rate by 25bps to 2.75% in December, replicating November's move, as clear evidence of economic cooling supports a case for more gradual tightening.

The Monetary Policy and Financial Stability Committee's quarterly rate projection suggested that a fine call between rates peaking at 3.0% and 3.25% at the time of the September Monetary Policy Report (MPR), but that may be lowered to suggest that only one more 25 bps hike is likely to be required in 2023, with the policy rate peaking at 3.0%.

The Bank's own Regional Network Report gave a strong signal that the economic slowdown is underway and that while the labour market remains tight it is now starting to ease as the effect of previous rate hikes kicks in.

When Norges Bank hiked by 25 bps in November, following three consecutive 50 bps hikes in June, August and September, Governor Ida Wolden Bache stated that the outlook was unusually uncertain but that "we will most likely raise the policy rate again in December."

SPEED OF TIGHTENING

November's debate was over whether to move 50 bps, in response to higher than expected inflation and a tighter than expected labour market, or to opt for slower tightening in response to signs that some areas of the economy were cooling. Since then Norges Bank's business survey, its Regional Network Report published this month, presented evidence to suggest that economic cooling is becoming widespread outside the oil sector.

The report showed business prospects the weakest since January 2009 with respondents expecting "rapidly rising prices and costs, higher interest rates and a decline in new public sector orders to dampen activity through (the) winter."

Moreover, while the labour was still tight by historic standards, there were signs of easing with a fall in the proportion of firms reporting capacity constraints and a decline in the number experiencing recruitment difficulties. Expected annual wage growth of 4.0% this year and 4.2% in 2023 was below the 4.6% for 2023 projected in the September forecast round.

The data flow, however, has not been all to the downside of the central bank's projections. Inflation on the CPI-ATE target measure, was 5.9% in October and 5.7% in November compared to the September MPR's prediction of 5.0% for both months with CPI at 7.5% and 6.5% respectively, compared to the MPR's 5.8% and 5.4%.While inflation is still way above the 2.0% target and stronger than anticipated, Norges Bank's business survey found a widespread belief that inflation is on a downpath.

More than half of respondents anticipated slower price rises in the coming year and the proportion anticipating any acceleration in prices in household facing sectors was the lowest in the survey's near-20 year history.