MNI NORGES WATCH: Inflation Dip Points To 25bp Hike

Norway’s central bank looks set to raise its key policy rate by 25 basis points to 4.0% at its August meeting, in line with its June guidance, after lower-than-expected July inflation sharply reduced the likelihood of another 50bp hike.

July’s CPI inflation came in 0.8 percentage point below the 6.2% forecast in Norges Bank’s June policy report, though the targeted CPI-ATE rate, which excludes tax changes and energy prices, was 0.1 point higher at 6.4%. The data left analysts united in expecting a 25bp increase this week, after markets earlier indicated a significant chance of another 50bp.

While June’s hike demonstrated Norges Bank’s willingness to accelerate tightening in the face of upside inflation shocks, any increase of more than 25bp in August would raise questions over the reliability of its guidance, particularly in the absence of a new forecast round to accompany decision. (See MNI INTERVIEW: Norges Could Move To Larger Hikes - Governor)

PEAK STILL TO COME

But Norges Bank's Committee for Monetary Policy and Financial Stability is expected to stick to its view that another hike will be needed this year. At the time of its 50bp June hike it said that the policy rate “will most likely be raised further in August" and was also likely to reach 4.25% "during the autumn.” After this month, the Bank will meet in September, November and December.

The recent appreciation of the krone, as oil prices push higher, has also eased pressure to hike more aggressively ahead of a further reappraisal of the outlook for the currency in September. Norges Bank's trade weighted I-44 currency index, on which lower numbers represent strength, moved from 126.20 at the end of May to 114.94 on August 10 before rebounding to 117.45 on Aug 14, In its June report Norges Bank forecast I-44 at 119.4 in 2023 and 118.1 in 2024.

Activity indicators have also shown signs of cooling while Norges Bank's lending survey found household and business demand for loans broadly unchanged in the second quarter with banks anticipating slightly weaker demand in the third quarter,.