MNI NORGES WATCH: Inflation Doubts Over Norges Hiking Slowdown

Norges Bank’s own projections have suggested it will slow its pace of hiking to 25bps at its meeting this week, but higher-than-expected inflation has left analysts divided over whether it will be able to move as anticipated or feel obliged to announce another 50bp increase on Thursday.

Norway’s central bank was early starting its tightening cycle, moving away from its zero lower bound in September 2021 and then accelerating with three consecutive 50bp increases, and it is now expected to be one of the first to stop tightening.

Its September Monetary Policy Report showed it raising the policy rate another 75bps in total over the next three meetings, with detailed projections broadly compatible with a peak just over 3.0% this winter before drifting back to around 2.5% three years ahead. Monetary policy was starting to have a tightening effect on the economy, which “may suggest a more gradual approach to policy rate setting ahead,” the Monetary Policy and Financial Stability Committee said.

HIGHER-THAN-EXPECTED INFLATION

The Committee, however, acknowledged that the outlook was especially uncertain with significant risks to the upside and downside. Inflation has since risen faster than the central bank assumed, with CPI adjusted for tax changes and excluding energy, the target CPI-ATE measure, rising by 5.3% on the year in September and up 1.0% on the month alone. In the September Monetary Policy Report CPI-ATE had been shown holding at 5.0% in September, October and November.

The November meeting is an interim one, with no quarterly forecasts and, normally, if there were to be any rethinking of policy it would more likely come in December, when the next forecast round will have been completed. Governor Ida Wolden Bache, however, is breaking with precedent and holding a press conference following an interim meeting, leaving the door open to her to explain any shift in approach.

The Norwegian krone had also been under pressure, although it has strengthened recently, appreciating 2.6% on its trade weighted i-44 index from its Sept 30 trough. Interest rate differentials, however, have been an uncertain guide to the krone's movements, and with market pricing suggesting an even chance of a 25 or 50bps increase it is unclear how much a hike would further strengthen the currency.